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Tax Rules and Business Investment

  • Economics


Tax Rules and Business Investment This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Taxes and Capital Formation Volume Author/Editor: Martin Feldstein, ed. Volume Publisher: University of Chicago Press Volume ISBN: 0-226-24079-7 Volume URL: Publication Date: 1987 Chapter Title: Tax Rules and Business Investment Chapter Author: Martin S. Feldstein Chapter URL: Chapter pages in book: (p. 63 - 72) 6 Tax Rules and Business Investment Martin Feldstein The current proposals to eliminate the investment tax credit and to modify other aspects of business taxation have brought renewed at- tention to the question of how sensitive business investment is to changes in tax rules. Critics of the tax changes proposed by the administration and of those enacted by the House of Representatives charge that they would significantly depress productive investment in business plant and equipment. The defenders of these proposals argue in reply that investment is relatively insensitive to tax rules, depending instead on capacity utilization and business confidence. This paper reviews new statistical evidence that the share of gross national product (GNP) devoted to net investment in plant and equip- ment is quite sensitive to tax-induced changes in the profitability of such investment. The specific quantitative analysis implies, for ex- ample, that the tax bill passed by the House of Representatives in December 1985 would reduce overall net investment in plant and equip- ment by approximately lo%, with larger reductions in equipment and smaller reductions in investment in structures. Over time, this reduc- tion in net investment would reduce the capital stock and gross in- vestment by even larger percentages. As a result, the eventual reduc- tion in gross investment would be approximately as large as the increase in tax revenue that wo

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