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Tax Policy and Business Fixed Investment in the United States

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  • Alan J. Auerbach
  • Kevin Hassett

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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Bibliographic Info

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: Feb 1991
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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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  1. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
  2. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Alan J. Auerbach & James R. Hines, Jr., 1987. "Anticipated Tax Changes and the Timing of Investment," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 163-200 National Bureau of Economic Research, Inc.
  4. 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(3), pages 585-644.
  5. Pindyck, Robert S & Rotemberg, Julio J, 1983. "Dynamic Factor Demands and the Effects of Energy Price Shocks," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 1066-79, December.
  6. Bernanke, Ben & Bohn, Henning & Reiss, Peter C., 1988. "Alternative non-nested specification tests of time-series investment models," Journal of Econometrics, Elsevier, Elsevier, vol. 37(3), pages 293-326, March.
  7. Matthew D. Shapiro, 1984. "The Dynamic Demand for Capital and Labor," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 735, Cowles Foundation for Research in Economics, Yale University.
  8. 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(1), pages 67-140.
  9. Alan J. Auerbach, 1986. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
  10. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  11. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 228-33, March.
  12. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, Econometric Society, vol. 55(3), pages 703-08, May.
  13. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 82, Board of Governors of the Federal Reserve System (U.S.).
  14. Alan J. Auerbach, 1982. "Taxation, Corporate Financial Policy and the Cost of Capital," NBER Working Papers 1026, National Bureau of Economic Research, Inc.
  15. Feldstein, Martin, 1982. "Inflation, Tax Rules and Investment: Some Econometric Evidence," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 825-62, July.
  16. Robert E. Hall, 1989. "Invariance Properties of Solow's Productivity Residual," NBER Working Papers 3034, National Bureau of Economic Research, Inc.
  17. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  18. Auerbach, Alan J & Hines, James R, Jr, 1988. "Investment Tax Incentives and Frequent Tax Reforms," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 211-16, May.
  19. Garber, Steven & Klepper, Steven, 1980. "Extending the Classical Normal Errors-in-Variables Model," Econometrica, Econometric Society, Econometric Society, vol. 48(6), pages 1541-46, September.
  20. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, Econometric Society, vol. 54(2), pages 249-73, March.
  21. Alan J. Auerbach, 1983. "Real Determinants of Corporate Leverage," NBER Working Papers 1151, National Bureau of Economic Research, Inc.
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