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Tax Policy and Business Fixed Investment in the United States

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Author Info
Alan J. Auerbach
Kevin Hassett

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Abstract

This paper derives and estimates models of nonresidential investment behavior in which current and future tax conditions directly affect the incentive to invest. The estimates suggest that taxes have played an independent role in affecting postwar U.S. investment behavior, particularly for investment in machinery and equipment. In addition, the paper develops a method for assessing the impact of tax policy on the volatility of investment when such policy is endogenous. Illustrative calculations using this technique, based on the paper's empirical estimates, suggest that tax policy has not served to stabilize investment in equipment or nonresidential structures during the sample period.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3619.

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Date of creation: Jun 1992
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Publication status: published as Journal of Public Economics, Vol.44, pp. 141-170, (1992).
Handle: RePEc:nbr:nberwo:3619

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Martin Feldstein, 1982. "Inflation, Tax Rules, and Investment: Some Econometric Evidence," NBER Working Papers 0577, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Alan J. Auerbach, 1985. "Real Determinants of Corporate Leverage," NBER Working Papers 1151, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
    Other versions:
  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  5. Shapiro, Matthew D, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 513-42, August. [Downloadable!] (restricted)
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  6. Alan J. Auerbach & James R. Hines Jr., 1988. "Investment Tax Incentives and Frequent Tax Reforms," NBER Working Papers 2492, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Garber, Steven & Klepper, Steven, 1980. "Extending the Classical Normal Errors-in-Variables Model," Econometrica, Econometric Society, vol. 48(6), pages 1541-46, September. [Downloadable!] (restricted)
  8. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
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  9. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  10. Pindyck, Robert S & Rotemberg, Julio J, 1983. "Dynamic Factor Demands and the Effects of Energy Price Shocks," American Economic Review, American Economic Association, vol. 73(5), pages 1066-79, December. [Downloadable!] (restricted)
  11. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1981-1), pages 67-140. [Downloadable!]
  13. Ben S. Bernanke & Henning Bohn & Peter C. Reiss, 1985. "Alternative Nonnested Specification Tests of Time Series Investment Models," NBER Technical Working Papers 0049, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March. [Downloadable!] (restricted)
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  15. Stephen M. Goldfeld & Alan S. Blinder, 1972. "Some Implications of Endogenous Stabilization Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 3(1972-3), pages 585-644. [Downloadable!]
  16. Auerbach, Alan J, 1989. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 939-62, November. [Downloadable!] (restricted)
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  17. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September. [Downloadable!] (restricted)
  18. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Austan Goolsbee, 1997. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," NBER Working Papers 6192, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Alvarez JR, Luis & Kanniainen, Vesa & Södersten, Jan, 2000. "Why is the Corporation Tax Not Neutral? Anticipated Tax Reform, Investment Spurts and Corporate Borrowing," Working Paper Series 2000:4, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  3. Darrel Cohen & Jason Cummins, 2006. "A retrospective evaluation of the effects of temporary partial expensing," Finance and Economics Discussion Series 2006-19, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. James R. Hines Jr., 1998. "Investment Ramifications of Distortionary Tax Subsidies," NBER Working Papers 6615, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Alan J. Auerbach, 2003. "Fiscal Policy, Past and Present," NBER Working Papers 10023, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Karzanova Irina, 2005. "Impact of tax regime on real sector investment in Russia: marginal effective tax rates for physical, human and R&D capital," EERC Working Paper Series 05-16e, EERC Research Network, Russia and CIS. [Downloadable!]
  8. Jason G. Cummins & R. Glenn Hubbard, 1994. "The Tax Sensitivity of Foreign Direct Investment: Evidence from Firm- Level Panel Data," NBER Working Papers 4703, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Ramesh Rao & Eric Stevens, 2006. "The Firm's Cost of Capital, Its Effective Marginal Tax Rate, and the Value of the Government's Tax Claim," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 6(1), pages 1465-1465. [Downloadable!] (restricted)
  10. Alan Auerbach, 2002. "Is There a Role for Discretionary Fiscal Policy?," NBER Working Papers 9306, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Michael Wasylenko, 1997. "Taxation and economic development: the state of the economic literature," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 37-52. [Downloadable!]
  12. Rosanne Altshuler & Jason Cummins, 1998. "Tax Policy and the Dynamic Demand for Domestic and Foreign Capital by Multinational Corporations," Departmental Working Papers 199808, Rutgers University, Department of Economics. [Downloadable!]
    Other versions:
  13. Hansen, Sten, 1999. "Agency Costs, Credit Constraints and Corporate Investment," Working Paper Series 79, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  14. Ahmed, S., 2004. "Modelling corporate tax liabilities using company accounts: a new framework," Cambridge Working Papers in Economics 0412, Faculty of Economics, University of Cambridge. [Downloadable!]
  15. John Pointon, Suzanne Farrar, Jon Tucker, 1996. "European taxation and capital investment," European Journal of Finance, Taylor and Francis Journals, vol. 2(1), pages 57-76, March. [Downloadable!] (restricted)
  16. Kevin A. Hassett & R. Glenn Hubbard, 1998. "Tax Policy and Investment," NBER Working Papers 5683, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Simeon Djankov & Tim Ganser & Caralee McLiesh & Rita Ramalho & Andrei Shleifer, 2008. "The Effect of Corporate Taxes on Investment and Entrepreneurship," NBER Working Papers 13756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Todd Sinai & Joseph Gyourko, 2000. "The Asset Price Incidence of Capital Gains Taxes: Evidence from the Taxpayer Relief Act of 1997 and Publicly-Traded Real Estate Firms," NBER Working Papers 7893, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Giampaolo Arachi & Federico Biagi, 2005. "Taxation, Cost of Capital and Investment: Do Tax Asymmetries Matter?," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(2-3), pages 295-322, November. [Downloadable!]
  20. Alan J. Auerbach & Kevin Hassett & Jan Sodersten, 1996. "Taxation and Corporate Investment: The Impact of the 1991 Swedish Tax Reform," NBER Working Papers 5189, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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