NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Investment Tax Incentives and Frequent Tax Reforms

Alan J. Auerbach, James R. Hines Jr.

NBER Working Paper No. 2492 (Also Reprint No. r1088)
Issued in 1988
NBER Program(s):   PE

Despite the frequency of tax changes and their potential importance to investors, almost all of the analysis of tax-based investment incentives assumes investors never anticipate any tax changes. We depart from this approach by analyzing the historical pattern of U.S. corporate investment incentives over the period 1953-86, incorporating the feature of investor awareness that the tax code may change. Our analysis incorporates a predictive equation for future tax variables into a model of optimal investment subject to adjustment costs and uncertainty. We find that expectations of future tax changes significantly affect the incentive to invest only if adjustment costs are low. In this case, the incentive to invest in 1986 was strong, as investors are estimated to have anticipated the coming reduction in investment incentives.

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Document Object Identifier (DOI): 10.3386/w2492

Published: The American Economic Review, Vol. 78, No. 2, pp. 211-216, (May 1988).

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