The Ineffectiveness of Effective Tax Rates on Business Investment

40 Pages Posted: 16 Jul 2004 Last revised: 30 Aug 2010

See all articles by Robert S. Chirinko

Robert S. Chirinko

University of Illinois at Chicago, Department of Finance; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 1985

Abstract

In his Fisher-Schultz Lecture, Martin Feldstein examined the effects of non-neutral tax rules on business investment by estimating three econometric models, and he concluded that "the rising rate of inflation has, because of the structure of existing U.S. tax rules, substantially discouraged investment in the past 15 years." In a detailed examination of Feldstein's Effective Tax Rate model and a less extensive review of his other formulations (Neoclassical and Return-Over-Cost models), a number of important and independent criticisms are advanced. Our results from examining all three models suggest strongly that taxes have not adversely affected capital formation during the recent episode of inflation, a conclusion consistent with the relatively robust levels of net investment between 1965 and 1981 actually shown in the newly benchmarked National Income data.

Suggested Citation

Chirinko, Robert S., The Ineffectiveness of Effective Tax Rates on Business Investment (September 1985). NBER Working Paper No. w1704. Available at SSRN: https://ssrn.com/abstract=338779

Robert S. Chirinko (Contact Author)

University of Illinois at Chicago, Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

HOME PAGE: http://tigger.uic.edu/~chirinko/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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