12 Pages Posted: 30 Oct 2007
Date Written: January 2002
As part of a fiscal stimulus package, some members of Congress have recently proposed a temporary investment subsidy. This paper uses the neoclassical growth model to evaluate the likely macroeconomic effects of such a subsidy. The model predicts a 0.8 percentage point increase in output growth in the quarter that the policy is implemented. In subsequent quarters, the output growth effects are negligible. As the subsidy ends, output growth falls 1 percentage point before returning to its trend growth rate. While a permanent subsidy will lead to more capital deepening in the long term, it also represents a permanent fall in government revenues. Under a temporary subsidy, there is less capital deepening, but the decline in government revenues is likewise more modest.
Suggested Citation: Suggested Citation
Gomme, Paul, Evaluating the Macroeconomic Effects of a Temporary Investment Tax Credit (January 2002). FRB of Cleveland Policy Discussion Paper No. 3. Available at SSRN: https://ssrn.com/abstract=1025459 or http://dx.doi.org/10.2139/ssrn.1025459