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The Ineffectiveness of Effective Tax Rates on Business Investment

  • Robert S. Chirinko

In his Fisher-Schultz Lecture, Martin Feldstein examined the effects of non-neutral tax rules on business investment by estimating three econometric models, and he concluded that "the rising rate of inflation has, because of the structure of existing U.S. tax rules, substantially discouraged investment in the past 15 years." In a detailed examination of Feldstein's Effective Tax Rate model and a less extensive review of his other formulations (Neoclassical and Return-Over-Cost models), a number of important and independent criticisms are advanced. Our results from examining all three models suggest strongly that taxes have not adversely affected capital formation during the recent episode of inflation, a conclusion consistent with the relatively robust levels of net investment between 1965 and 1981 actually shown in the newly benchmarked National Income data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1704.

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Date of creation: Sep 1985
Date of revision:
Publication status: published as Chirinko, Robert S. "The Ineffectiveness of Effective Tax Rates: A Comment on Feldstein's Fisher-Schultz Lecture," Journal of Public Economics Volume: 32 Issue: 3 (April 1987) Pages: 369-387
Handle: RePEc:nbr:nberwo:1704
Note: EFG PE
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