Working Paper: NBER ID: w0577
Authors: Martin Feldstein
Abstract: This paper presents econometric evidence on the effect of tax incentives on business Investment in the United States in the period from 1953 through1978. The analysis emphasizes that the Interaction of inflation and existing tax rules has contributed substantially to the decline of business investment since the late 1960's.Because the investment process is far too complex for any simple econometric model to be convincing, I have estimated three quite different models of investment behavior. The strength of the empirical evidence rests on the fact that all three specifications support the same conclusion. More generally, the analysis and evidence show that theoretical models of macroeconomic equilibrium should specify explicitly the role of distortionary taxes, especially taxes on capital income. The failure to include such tax rules can have dramatic and misleading effects on the qualitative as well as the quantitative properties of macroeconomic theories. This paper was presented as the Fisher-Shultz Lecture at the Fourth World Congress of the Econometric Society, 29 August 1980, in Aix-en-Province.
Keywords: Inflation; Tax Incentives; Business Investment; Econometric Models
JEL Codes: H25; E31; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation (E31) | Effective Tax Rate on Capital Income (H24) |
| Effective Tax Rate on Capital Income (H24) | Real Net Rate of Return (G19) |
| Real Net Rate of Return (G19) | Business Investment (G31) |
| Inflation + Existing Tax Rules (H29) | Decline of Business Investment (G31) |
| Failure to include tax rules in macroeconomic models (E19) | Misleading effects on properties (C92) |