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Investment Tax Credit Reconsidered, Business Tax Incentives and Investments

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  • Thomas Karier

Abstract

Karier explores the efficacy of the investment tax credit (ITC) in stimulating private investment spending. He notes that there are three possible channels through which an ITC can act on investment: price, income, and multiplier effects. He finds that ITCs do not appear to have had a significant effect on equipment investment; that the effects of a decline in corporate tax rates (the income effect) were distributed among increased dividends and fewer equity and debt issuances and had little influence on investment; and that capacity utilization and real GDP growth were the only business cycle variables that had a significant effect on equipment investment growth. Based on these findings, Karier concludes that alternatives to tax investment credit programs must be found and pursued. He suggests undertaking a modest program of direct public investment financed by rearranging spending priorities within the budget; a more expansive program could be financed through additional borrowing or through an increase in the corporate income tax.

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  • Thomas Karier, "undated". "Investment Tax Credit Reconsidered, Business Tax Incentives and Investments ," Economics Public Policy Brief Archive 13, Levy Economics Institute.
  • Handle: RePEc:lev:levppb:13
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    References listed on IDEAS

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    1. Nadiri, M Ishaq & Mamuneas, Theofanis P, 1994. "The Effects of Public Infrastructure and R&D Capital on the Cost Structure and Performance of U.S. Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 22-37, February.
    2. Card, David & Krueger, Alan B, 1992. "Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 1-40, February.
    3. J. Bradford De Long & Lawrence H. Summers, 1991. "Equipment Investment and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 445-502.
    4. Alicia H. Munnell & Leah M. Cook, 1990. "How does public infrastructure affect regional economic performance?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 11-33.
    5. Peter K. Clark, 1993. "Tax Incentives and Equipment Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 317-347.
    6. Laurence H. Meyer & Joel L. Prakken & Chris P. Varvares, 1993. "Policy Watch: Designing an Effective Investment Tax Credit," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 189-196, Spring.
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