The Investment Tax Credit: An Evaluation

47 Pages Posted: 16 Jul 2004 Last revised: 11 Aug 2010

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)

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: November 1979

Abstract

Since1954, the United States government has made numerous adjustments in the tax treatment of corporate income with the aim of influencing the level and composition of fixed business investment. The effects of these reforms, principally changes in the investment tax credit, are evaluated using a macro-econometric model. We find little evidence that the investment tax credit is an effective fiscal policy tool. Changes in the credit have tended to destabilize the economy, and have yielded much less stimulus per dollar of revenue loss than has previously been assumed. The crowding out of "non-favored" investment has been sufficient to offset a large percentage of the increase in the stock of equipment resulting from the use of the credit. We are led to conclude that the reliance on the investment tax credit and other investment tax incentives should be reduced. If a credit is to be maintained, it is of the utmost importance that its effect on all sectors of the economy be considered. We analyze several possible neutrality criteria, but conclude that no simple rule can guide the optimal structuring of incentives.

Suggested Citation

Auerbach, Alan Jeffrey and Summers, Lawrence H., The Investment Tax Credit: An Evaluation (November 1979). NBER Working Paper No. w0404. Available at SSRN: https://ssrn.com/abstract=261252

Alan Jeffrey Auerbach (Contact Author)

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

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

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Lawrence H. Summers

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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