Investment Tax Incentives and Frequent Tax Reforms

14 Pages Posted: 4 Feb 2001

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)

James R. Hines Jr.

University of Michigan; NBER

Date Written: 1988

Abstract

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.

Suggested Citation

Auerbach, Alan Jeffrey and Hines, James Rodger, Investment Tax Incentives and Frequent Tax Reforms (1988). NBER Working Paper No. w2492. Available at SSRN: https://ssrn.com/abstract=253127

Alan Jeffrey Auerbach (Contact Author)

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

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510-643-0711 (Phone)
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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Germany

James Rodger Hines

University of Michigan ( email )

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Ann Arbor, MI 48109-1215
United States

NBER

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Cambridge, MA 02138
United States

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