NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Investment versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts

Alan J. Auerbach, Laurence J. Kotlikoff

NBER Working Paper No. 1027 (Also Reprint No. r0427)
Issued in November 1982
NBER Program(s):   PE

This paper examines the closed economy effects of government policies that vary with respect to whether they treat newly produced capital differently from old capital. Policies that do make this distinction are denoted investment policies, while those that do not are labelled savings policies. While both types of policies alter marginal incentives to accumulate new capital, investment incentives can generate significant inframarginal redistribution from current holders of wealth to those with small or zero claims on the existing capital stock. Among the principal findings, based on simulations of a general equilibrium, perfect foresight, overlapping generations life-cycle model, are:1)Investment incentives, even if financed by short run increases in the stock of debt, significantly increase capital formation.2)Deficit-financed savings incentives, in contrast, typically reduce the economy's long run capital stock.3)Deficit-financed investment incentives can actually be self-financing,in that they may lead to a long run surplus without any increase in other tax rates.

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Document Object Identifier (DOI): 10.3386/w1027

Published:

  • Kotlikoff, Laurence J. A short summary "National Savings and Economic Policy: The Efficacy of Investment vs. Savings Incentives." American Economic Review, Vol. 73, No. 2, (May 1983), pp. 82-87.
  • Meyer, L. H. (ed.) The Economic Consequences of Government Deficits. Springer, 1983.

 
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