Recent U.S. Investment Behavior and the Tax Reform Act of 1986: A Disaggregate View

42 Pages Posted: 13 Nov 2007

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)

Kevin A. Hassett

American Enterprise Institute (AEI)

Date Written: February 1991

Abstract

The Tax Reform Act of 1986 was expected to cause an overall decline in business fixed investment and a shift in the composition of investment away from machinery and equipment, which previously had received an investment tax credit. Yet neither investment relative to GNP nor equipment investment relative to total investment declined during the period 1987-89. This paper's analysis of investment at the level of individual industries and assets helps reconcile the recent pattern of investment and the predicted effects of the Tax Reform Act. We find that the trend toward investment in equipment predated the Act, and that recent investment in equipment has fallen short of what would have been expected on the basis on nontax factors alone. Using a new technique to identify the impact of taxation on investment, we confirm the importance of tax policy using the cross-section pattern of equipment investment since 1986.

Suggested Citation

Auerbach, Alan Jeffrey and Hassett, Kevin A., Recent U.S. Investment Behavior and the Tax Reform Act of 1986: A Disaggregate View (February 1991). NBER Working Paper No. w3626. Available at SSRN: https://ssrn.com/abstract=471561

Alan Jeffrey Auerbach (Contact Author)

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

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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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Kevin A. Hassett

American Enterprise Institute (AEI) ( email )

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United States
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202.862.7177 (Fax)

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