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Recent U.S. investment behavior and the tax reform act of 1986: A disaggregate view

  • Auerbach, Alan J.
  • Hassett, Kevin

The Tax Reform Act of 1986 was expected to cause an overall decline in business fixed investment and a shift in the composition of investment away from machinery and equipment, which previously had received an investment tax credit. Yet neither investment relative to GNP nor equipment investment relative to total investment declined during the period 1987-89. This paper's analysis of investment at the level of individual industries and assets helps reconcile the recent pattern of investment and the predicted effects of the Tax Reform Act. We find that the trend toward investment in equipment predated the Act, and that recent investment in equipment has fallen short of what would have been expected on the basis on nontax factors alone. Using a new technique to identify the impact of taxation on investment, we confirm the importance of tax policy using the cross-section pattern of equipment investment since 1986.

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Article provided by Elsevier in its journal Carnegie-Rochester Conference Series on Public Policy.

Volume (Year): 35 (1991)
Issue (Month): 1 (January)
Pages: 185-215

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Handle: RePEc:eee:crcspp:v:35:y:1991:i::p:185-215
Contact details of provider: Web page: http://www.elsevier.com/locate/jme

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  1. 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.
  2. Robert J. Barro, 1976. "Unanticipated Money Growth and Unemployment in the United States," Working Papers 234, Queen's University, Department of Economics.
  3. Barry P. Bosworth, 1985. "Taxes and the Investment Recovery," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 1-45.
  4. Auerbach, A.J. & Hines, Jr.J.R., 1988. "Investment Tax Incentives And Frequent Tax Reforms," Papers 135, Princeton, Woodrow Wilson School - Public and International Affairs.
  5. repec:fth:harver:1465 is not listed on IDEAS
  6. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
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