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Inflation, Tax Rules and Investment: Some Econometric Evidence

  • Feldstein, Martin

This paper presents econometric evidence on the effect of tax incentives on business Investment in the United States in the period from 1953 through1978. The analysis emphasizes that the Interaction of inflation and existing tax rules has contributed substantially to the decline of business investment since the late 1960's.Because the investment process is far too complex for any simple econometric model to be convincing, I have estimated three quite different models of investment behavior. The strength of the empirical evidence rests on the fact that all three specifications support the same conclusion. More generally, the analysis and evidence show that theoretical models of macroeconomic equilibrium should specify explicitly the role of distortionary taxes, especially taxes on capital income. The failure to include such tax rules can have dramatic and misleading effects on the qualitative as well as the quantitative properties of macroeconomic theories. This paper was presented as the Fisher-Shultz Lecture at the Fourth World Congress of the Econometric Society, 29 August 1980, in Aix-en-Province.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 50 (1982)
Issue (Month): 4 (July)
Pages: 825-62

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Handle: RePEc:ecm:emetrp:v:50:y:1982:i:4:p:825-62
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  1. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
  2. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-44, December.
  3. Feldstein, Martin S & Chamberlain, Gary, 1973. "Multimarket Expectations and the Rate of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(4), pages 873-902, November.
  4. Martin Feldstei & Jerry Green & Eytan Sheshinski, 1978. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," NBER Chapters, in: Research in Taxation, pages 53-70 National Bureau of Economic Research, Inc.
  5. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 1-18, January.
  6. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February.
  7. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  8. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  9. M. S. Feldstein & J. S. Flemming, 1971. "Tax Policy, Corporate Saving and Investment Behaviour in Britain," Review of Economic Studies, Oxford University Press, vol. 38(4), pages 415-434.
  10. Martin Feldstein & Jerry Green & Eytan Sheshinski, 1979. "Corporate Financial Policy and Taxation in a Growing Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 411-432.
  11. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  12. Feldstein, Martin & Green, Jerry, 1983. "Why Do Companies Pay Dividends?," American Economic Review, American Economic Association, vol. 73(1), pages 17-30, March.
  13. J. Helliwell & G. Glorieux, 1970. "Forward-Looking Investment Behaviour," Review of Economic Studies, Oxford University Press, vol. 37(4), pages 499-516.
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