This paper uses a dynamic computable general equilibrium model to
compare, in an economy open to international capital flows, the effects of two
U.S. policies intended to promote domestic capital formation. The two
policies -- the introduction of an investment tax credit (ITC) and a reduction
in the statutory corporate income tax rate -- differ in their treatment of old
(existing) and new capital. The model features adjustment dynamics,
intertemporal optimization by U.S. and foreign households and firms endowed
with model-consistent expectations, imperfect substitution between domestic
and foreign assets in portfolios, an integrated treatment of the current and
capital accounts of the balance of payments, and industry disaggregation in
the United States.
We find that the two policies (scaled to imply the same revenue cost)
differ in their consequences for foreign and domestic welfare, the balance of
payments accounts, international competitiveness, and U.S. industrial
structure. The ITC produces larger domestic welfare gains because it is more
effective in reducing intertemporal distortions, while the two policies have
similar implications for intersectoral efficiency. From the point of view of
domestic welfare, the relative attractiveness of the ITC is enhanced when
international capital mobility is taken into account, a reflection of
international transfers of wealth associated with foreign ownership of part of
the U.S. capital stock. Whereas reducing the corporate tax rate improves the
trade balance initially, introducing the ITC causes a deterioration of the
trade balance in the short run. Reflecting a lower real exchange rate,
export-oriented sectors perform better relative to non-tradable industries
under a lower corporate tax rate than in the presence of the lTC, especially
in the short run.
*Published:
Bovenberg, A Lans & Goulder, Lawrence H, 1993. " Promoting Investment under International Capital Mobility: An Intertemporal General Equilibrium Analysis," Scandinavian Journal of Economics, Blackwell Publishing, vol. 95(2), pages 133-56.
You may purchase this paper on-line in .pdf format
from SSRN.com ($5) for electronic delivery.
Machine-readable bibliographic record -
MARC,
RIS,
BibTeX
