TY  - JOUR
AU  - Hines,James R.,Jr.
TI  - Investment Ramifications of Distortionary Tax Subsidies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6615
PY  - 1998
Y2  - June 1998
UR  - http://www.nber.org/papers/w6615
L1  - http://www.nber.org/papers/w6615.pdf
N1  - Author contact info:
James R. Hines
Department of Economics
University of Michigan
343 Lorch Hall
611 Tappan Street
Ann Arbor, MI  48109-1220
Tel: 734/764-2320
Fax: 734/764-2769
E-Mail: jrhines@umich.edu
AB  - This paper examines the investment effects of tax subsidies for which some assets and not others are eligible.  Distortionary tax subsidies encourage firms to concentrate investments in tax-favored assets profitability of investment and reducing payoffs to bondholders in the event of default.  Anticipation of asset substitution makes borrowing more expensive, which in turn discourages investment.  Borrowing rates react so strongly that aggregate investment may rise very little, or even fall, in response to higher tax credits.  Observed positive corporate bond market reactions to events surrounding passage of the U.S. Tax Reform Act of 1986 are consistent with the model's implications.
ER  -