NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Investment Tax Credit: An Evaluation

Alan J. Auerbach, Lawrence H. Summers

NBER Working Paper No. 404
Issued in November 1979
NBER Program(s):   PE

Since1954, the United States government has made numerous adjustments in the tax treatment of corporate income with the aim of influencing the level and composition of fixed business investment. The effects of these reforms, principally changes in the investment tax credit, are evaluated using a macro-econometric model. We find little evidence that the investment tax credit is an effective fiscal policy tool. Changes in the credit have tended to destabilize the economy, and have yielded much less stimulus per dollar of revenue loss than has previously been assumed. The crowding out of "non-favored" investment has been sufficient to offset a large percentage of the increase in the stock of equipment resulting from the use of the credit. We are led to conclude that the reliance on the investment tax credit and other investment tax incentives should be reduced. If a credit is to be maintained, it is of the utmost importance that its effect on all sectors of the economy be considered. We analyze several possible neutrality criteria, but conclude that no simple rule can guide the optimal structuring of incentives.

download in pdf format
   (305 K)

email paper

This paper is available as PDF (305 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0404

Users who downloaded this paper also downloaded these:
Bradford w0269 Tax Neutrality and the Investment Tax Credit
Sen and Turnovsky w3298 Investment Tax Credit in an Open Economy
Lyon w2537 The Effect Of The Investment Tax Credit On The Value Of The Firm
Stanback, Jr. THE INVESTMENT CREDIT
Djankov, Ganser, McLiesh, Ramalho, and Shleifer w13756 The Effect of Corporate Taxes on Investment and Entrepreneurship
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us