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The Impacts on Capital Allocation of Some Aspects of the Economic Recovery Tax Act of 1981

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  • Patric H. Hendershott
  • James D. Shilling

Abstract

This paper develops and employs a five-asset, four-household and single-business sector simulation model to measure the long-run impacts of the major provisions of the Economic Recovery Tax Act of 1981 on the allocation of a fixed capital stock among owner-occupied housing, rental housing, and nonresidential capital. The specific provisions analyzed are the increases in tax depreciation for nonresidential capital and rental housing and the reduction in the maximum tax rate on unearned income. Our analysis suggests a 6 percent increase in nonresidential capital, an 11 percent decline in owner-occupied housing and little change in rental housing (the increase in the number of renters -- the homeownership rate declines by 1 1/2 percentage points -- offsets a decline in the quantity of rental services demanded per renter). In the absence of an increase in aggregate saving, real pretax interest rates rise by nearly two percentage points. Corporate profit taxes decline by 60 percent, and after-tax earnings rise by 25 percent. As a result of the Act, the net (of depreciation) user costs for the three types of capital will almost be equalized.

Suggested Citation

  • Patric H. Hendershott & James D. Shilling, 1981. "The Impacts on Capital Allocation of Some Aspects of the Economic Recovery Tax Act of 1981," NBER Working Papers 0825, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0825
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    References listed on IDEAS

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    1. King, Mervyn A., 1980. "An econometric model of tenure choice and demand for housing as a joint decision," Journal of Public Economics, Elsevier, vol. 14(2), pages 137-159, October.
    2. Feldstein, Martin S & Fane, George, 1973. "Taxes, Corporate Dividend Policy and Personal Savings: The British Postwar Experience," The Review of Economics and Statistics, MIT Press, vol. 55(4), pages 399-411, November.
    3. Mervyn A. King, 1980. "An Econometric Model of Tenure Choice and Demand for Housing as a Joint Decision," NBER Chapters, in: Econometric Studies in Public Finance, pages 137-159, National Bureau of Economic Research, Inc.
    4. Polinsky, A Mitchell & Ellwood, David T, 1979. "An Empirical Reconciliation of Micro and Grouped Estimates of the Demand for Housing," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 199-205, May.
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    Cited by:

    1. Patric H. Hendershott, 1985. "Tax reform and financial markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 29, pages 153-186.
    2. Patric H. Hendershott & David C. Ling, 1984. "Prospective Changes in Tax Law and the Value of Depreciable Real Estate," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 297-317, September.
    3. Patric H. Hendershott & Roger D. Huang, 1985. "Debt and Equity Yields, 1926-1980," NBER Chapters, in: Corporate Capital Structures in the United States, pages 117-166, National Bureau of Economic Research, Inc.

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