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

45 Pages Posted: 8 Jun 2004 Last revised: 14 Apr 2008

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Date Written: November 1982

Abstract

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.

Suggested Citation

Auerbach, Alan Jeffrey and Kotlikoff, Laurence J., Investment Versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts (November 1982). NBER Working Paper No. w1027. Available at SSRN: https://ssrn.com/abstract=227183

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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Laurence J. Kotlikoff

Boston University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Gaidar Institute for Economic Policy

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Russia

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