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The Investment Tax Credit: An Evaluation

  • Alan J. Auerbach
  • Lawrence H. Summers

Since1954, the United States government has made numerous adjustments in the tax treatment of corporate income with the aim of influencing the level and composition of fixed business investment. The effects of these reforms, principally changes in the investment tax credit, are evaluated using a macro-econometric model. We find little evidence that the investment tax credit is an effective fiscal policy tool. Changes in the credit have tended to destabilize the economy, and have yielded much less stimulus per dollar of revenue loss than has previously been assumed. The crowding out of "non-favored" investment has been sufficient to offset a large percentage of the increase in the stock of equipment resulting from the use of the credit. We are led to conclude that the reliance on the investment tax credit and other investment tax incentives should be reduced. If a credit is to be maintained, it is of the utmost importance that its effect on all sectors of the economy be considered. We analyze several possible neutrality criteria, but conclude that no simple rule can guide the optimal structuring of incentives.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0404.

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Date of creation: Nov 1979
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Handle: RePEc:nbr:nberwo:0404
Note: PE
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  1. Aaron, Henry J, 1976. "Inflation and the Income Tax," American Economic Review, American Economic Association, vol. 66(2), pages 193-99, May.
  2. Eckstein, Otto & Green, Edward W & Sinai, Allen, 1974. "The Data Resources Model: Uses, Structure, and Analysis of the U.S. Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 595-615, October.
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