Working Paper: NBER ID: w0637
Authors: David F. Bradford
Abstract: This paper examines the characteristics of and interactions among measures to effect saving and investment incentives ("S-I incentives")in the context of an income tax system that is inadequately indexed for inflation. Examples are proposals for more rapid depreciation of buildings and equipment and proposals to exempt larger amounts of interest income. SI incentives are classified into "consumption tax" and "direct grant" types, and it is shown that these differ in their influence on portfolio choices, in their sensitivity to inflation and in the design problems they present. Stress is placed on requirements for neutrality with respect to asset durability and portfolio composition. A new result is the derivation of the reduction in interest taxation yielding neutrality in the presence of partial expensing of real investment or equivalent investment incentive.
Keywords: saving incentives; investment incentives; income tax; inflation; capital formation
JEL Codes: H24; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inadequately indexed income tax system (H24) | negative effects of inflation on capital accumulation (E22) |
| negative effects of inflation on capital accumulation (E22) | deterioration in the rate of return for savers (E43) |
| inflation (E31) | distortion of expected returns on investments (G11) |
| more rapid depreciation of assets (G32) | neutralization of adverse effects of inflation on investment returns (G11) |
| tax policy adjustments (H29) | increased capital formation (E22) |
| shift from income-based tax system to consumption-based tax system (H22) | alleviation of disincentives for savers and investors (G51) |