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Evaluating the macroeconomic effects of a temporary investment tax credit

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  • Paul Gomme

Abstract

As part of a fiscal stimulus package, some members of Congress have recently proposed a temporary investment subsidy. This paper uses the neoclassical growth model to evaluate the likely macroeconomic effects of such a subsidy. The model predicts a 0.8 percentage point increase in output growth for the quarter in which the policy is implemented. In subsequent quarters, the output growth effects are negligible. As the subsidy ends, output growth falls by 1 percentage point before returning to its trend growth rate. While a permanent subsidy will lead to more capital deepening in the long term, it also represents a permanent fall in government revenues. Under a temporary subsidy, there is less capital deepening but the decline in government revenues is likewise more modest.

Suggested Citation

  • Paul Gomme, 2002. "Evaluating the macroeconomic effects of a temporary investment tax credit," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jan.
  • Handle: RePEc:fip:fedcpd:y:2002:i:jan:n:3
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    File URL: http://www.clevelandfed.org/research/PolicyDis/No3Jan02.pdf
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    Cited by:

    1. Stefan F. Schubert & Stephen J. Turnovsky, 2006. "Anticipated Fiscal Policy Changes and Goods Market Adjustments," German Economic Review, Verein für Socialpolitik, vol. 7(2), pages 135-161, May.

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    Keywords

    Fiscal policy; Tax credits;

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