Tax Policy and Corporate Investment / Lawrence H. Summers.

By:

Summers, Lawrence H

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0605.Publication details: Cambridge, Mass. National Bureau of Economic Research 1980.Description: 1 online resource: illustrations (black and white)Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: This paper overviews the issues connected with proposals to spur investment using tax incentives. There are four main conclusions: (1) The rate of net capital formation in the U.S. has declined very substantially. This decline has been associated with a sharp fall in the after tax return to investors in the corporate sector. (2) Increasing the share of output devoted to business capital formation would not have a large effect on the rate of productivity growth, inflation or employment. However, it would contribute substantially to intertemporal economic efficiency. The welfare gains achievable through investment incentives approach $100 billion. (3) Measures to spur investment are likely to have substantial effects. The lags are, however, very long. For example, it is estimated that the elimination of capital gains taxes would raise the capital stock by 29 percent in the long run, but by only 4 percent within five years. (4) Through judicious design of tax policy, it is possible to spur investment with only a small revenue cost. It is crucial to take account of the effect of anticipated policy on the level of investment. Traditional Keynesian econometric approaches are ill-suited to this goal.

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Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w0605 (Browse shelf(Opens below))	Not For Loan

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December 1980.

This paper overviews the issues connected with proposals to spur investment using tax incentives. There are four main conclusions: (1) The rate of net capital formation in the U.S. has declined very substantially. This decline has been associated with a sharp fall in the after tax return to investors in the corporate sector. (2) Increasing the share of output devoted to business capital formation would not have a large effect on the rate of productivity growth, inflation or employment. However, it would contribute substantially to intertemporal economic efficiency. The welfare gains achievable through investment incentives approach $100 billion. (3) Measures to spur investment are likely to have substantial effects. The lags are, however, very long. For example, it is estimated that the elimination of capital gains taxes would raise the capital stock by 29 percent in the long run, but by only 4 percent within five years. (4) Through judicious design of tax policy, it is possible to spur investment with only a small revenue cost. It is crucial to take account of the effect of anticipated policy on the level of investment. Traditional Keynesian econometric approaches are ill-suited to this goal.