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Issues in the Design of Saving and Investment Incentives

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  • David F. Bradford

Abstract

This paper examines the characteristics of and interactions among measures to effect saving and investment incentives ("S-I incentives")in the context of an income tax system that is inadequately indexed for inflation. Examples are proposals for more rapid depreciation of buildings and equipment and proposals to exempt larger amounts of interest income. SI incentives are classified into "consumption tax" and "direct grant" types, and it is shown that these differ in their influence on portfolio choices, in their sensitivity to inflation and in the design problems they present. Stress is placed on requirements for neutrality with respect to asset durability and portfolio composition. A new result is the derivation of the reduction in interest taxation yielding neutrality in the presence of partial expensing of real investment or equivalent investment incentive.

Suggested Citation

  • David F. Bradford, 1981. "Issues in the Design of Saving and Investment Incentives," NBER Working Papers 0637, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0637 Note: PE
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    1. Fabricant, Solomon, 1978. "Accounting for Business Income under Inflation: Current Issues and Views in the United States," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 24(1), pages 1-24, March.
    2. Aaron, Henry J, 1976. "Inflation and the Income Tax," American Economic Review, American Economic Association, vol. 66(2), pages 193-199, May.
    3. Alan J. Auerbach, 1979. "The Optimal Taxation of Heterogeneous Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 589-612.
    4. Auerbach, Alan J, 1981. "Inflation and the Tax Treatment of Firm Behavior," American Economic Review, American Economic Association, vol. 71(2), pages 419-423, May.
    5. Martin Feldstein, 1979. "Adjusting Depreciation in an Inflationary Economy: Indexing versus Acceleration," NBER Working Papers 0395, National Bureau of Economic Research, Inc.
    6. Roger H. Gordon & Burton G. Malkiel, 1980. "Taxation and Corporation Finance," NBER Working Papers 0576, National Bureau of Economic Research, Inc.
    7. Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72, pages 604-604.
    8. Roger H. Gordon, 1984. "Inflation, Taxation, and Corporate Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 99(2), pages 313-327.
    9. Malkiel, Burton G, 1979. "The Capital Formation Problem in the United States," Journal of Finance, American Finance Association, vol. 34(2), pages 291-306, May.
    10. Feldstein, Martin S, 1977. "Does the United States Save too Little?," American Economic Review, American Economic Association, vol. 67(1), pages 116-121, February.
    11. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    12. Auerbach, Alan J, 1979. "Inflation and the Choice of Asset Life," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 621-638, June.
    13. Auerbach, Alan J, 1981. "A Note on the Efficient Design of Investment Incentives," Economic Journal, Royal Economic Society, vol. 91(361), pages 217-223, March.
    14. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
    15. John B. Shoven & Jeremy I. Bulow, 1976. "Inflation Accounting and Nonfinancial Corporate Profits: Financial Assets and Liabilities," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 15-66.
    16. Eisner, Robert, 1977. "Capital Shortage: Myth and Reality," American Economic Review, American Economic Association, vol. 67(1), pages 110-115, February.
    17. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters,in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
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    Cited by:

    1. David F. Bradford & Kyle Logue, 1998. "The Effects of Tax Law Changes on Property-Casualty Insurance Prices," NBER Chapters,in: The Economics of Property-Casualty Insurance, pages 29-80 National Bureau of Economic Research, Inc.

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