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The Investment Tax Credit: An Evaluation

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  • Alan J. Auerbach
  • Lawrence H. Summers

Abstract

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.

Suggested Citation

  • Alan J. Auerbach & Lawrence H. Summers, 1979. "The Investment Tax Credit: An Evaluation," NBER Working Papers 0404, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0404
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    References listed on IDEAS

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    1. Aaron, Henry J, 1976. "Inflation and the Income Tax," American Economic Review, American Economic Association, vol. 66(2), pages 193-199, 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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    Cited by:

    1. Sebastian Eichfelder & Kerstin Schneider, 2014. "Tax Incentives and Business Investment: Evidence from German Bonus Depreciation," CESifo Working Paper Series 4805, CESifo Group Munich.
    2. Raffaello Bronzini & Guido de Blasio & Guido Pellegrini & Alessandro Scognamiglio, 2008. "The effect of investment tax credit: Evidence from an atypical programme in Italy," Temi di discussione (Economic working papers) 661, Bank of Italy, Economic Research and International Relations Area.
    3. Edge, Rochelle M. & Rudd, Jeremy B., 2011. "General-equilibrium effects of investment tax incentives," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 564-577.
    4. Пинская М.Р. & Колесник Г.В., 2016. "Разграничение Полномочий Между Федеральным И Региональным Уровнями Власти В Области Налоговых Льгот: Фискальные Последствия," Журнал Экономика и математические методы (ЭММ), Центральный Экономико-Математический Институт (ЦЭМИ), vol. 52(3), pages 22-35, июль.
    5. Rochelle M. Edge & Jeremy B. Rudd, 2010. "General-equilibrium effects of investment tax incentives," Finance and Economics Discussion Series 2010-17, Board of Governors of the Federal Reserve System (U.S.).

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