Tax Neutrality and the Investment Tax Credit

David F. Bradford

NBER Working Paper No. 269 (Also Reprint No. r0127)
Issued in July 1978
NBER Program(s):   PE

This paper concerns the question of how the rules for calculating the investment tax credit and the associated rules for calculating depreciation allowances for tax purposes should be structured to assure the "appropriate" relationship between the subsidy granted to long-lived assets and that to short-lived assets. The increasing rate of tax subsidy under the investment credit favors long-lived assets by comparison with a flat-rate credit, while the neglect of the credit in calculating depreciation allowances favors short-lived assets (for which the depreciation allowance is a more important element in the cash flow). In reviewing the literature on this issue, Emil Sunley focused on the question of whether the investment credit should vary with the durability of the asset purchased. He concluded that neutrality requires a subsidy rate increasing with the useful life of the asset in a way qualitatively similar to that prescribed in present U.S. law. This paper develops Sunley's discussion through the use of simple formal models of the yield from investment.

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Document Object Identifier (DOI): 10.3386/w0269

Published: Bradford, David F. "Tax Neutrality and the Investment Tax Credit." The Economics of Taxation, edited by Henry J. Aaron and Michael J. Boskin, pp. 281- 298. Washington, D.C.: The Brookings Institution, 1980.

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