Tax Policy and Corporate Investment

59 Pages Posted: 5 Jul 2004 Last revised: 29 Aug 2010

See all articles by Lawrence H. Summers

Lawrence H. Summers

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

Date Written: December 1980

Abstract

This paper overviews the issues connected with proposals to spur investment using tax incentives. There are four main conclusions: (1) The rate of net capital formation in the U.S. has declined very substantially. This decline has been associated with a sharp fall in the after tax return to investors in the corporate sector. (2) Increasing the share of output devoted to business capital formation would not have a large effect on the rate of productivity growth, inflation or employment. However, it would contribute substantially to intertemporal economic efficiency. The welfare gains achievable through investment incentives approach $100 billion. (3) Measures to spur investment are likely to have substantial effects. The lags are, however, very long. For example, it is estimated that the elimination of capital gains taxes would raise the capital stock by 29 percent in the long run, but by only 4 percent within five years. (4) Through judicious design of tax policy, it is possible to spur investment with only a small revenue cost. It is crucial to take account of the effect of anticipated policy on the level of investment. Traditional Keynesian econometric approaches are ill-suited to this goal.

Suggested Citation

Summers, Lawrence H., Tax Policy and Corporate Investment (December 1980). NBER Working Paper No. w0605. Available at SSRN: https://ssrn.com/abstract=275365

Lawrence H. Summers (Contact Author)

Harvard University ( email )

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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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