Working Paper: NBER ID: w0825
Authors: Patric H. Hendershott; James D. Shilling
Abstract: This paper develops and employs a five-asset, four-household and single-business sector simulation model to measure the long-run impacts of the major provisions of the Economic Recovery Tax Act of 1981 on the allocation of a fixed capital stock among owner-occupied housing, rental housing, and nonresidential capital. The specific provisions analyzed are the increases in tax depreciation for nonresidential capital and rental housing and the reduction in the maximum tax rate on unearned income. Our analysis suggests a 6 percent increase in nonresidential capital, an 11 percent decline in owner-occupied housing and little change in rental housing (the increase in the number of renters -- the homeownership rate declines by 1 1/2 percentage points -- offsets a decline in the quantity of rental services demanded per renter). In the absence of an increase in aggregate saving, real pretax interest rates rise by nearly two percentage points. Corporate profit taxes decline by 60 percent, and after-tax earnings rise by 25 percent. As a result of the Act, the net (of depreciation) user costs for the three types of capital will almost be equalized.
Keywords: Economic Recovery Tax Act; capital allocation; simulation model; tax policy; housing investment
JEL Codes: H25; H31; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic Recovery Tax Act of 1981 (E65) | nonresidential capital (R33) |
| Economic Recovery Tax Act of 1981 (E65) | owner-occupied housing (R21) |
| Economic Recovery Tax Act of 1981 (E65) | homeownership rate (R21) |
| homeownership rate (R21) | number of renters (R21) |
| Economic Recovery Tax Act of 1981 (E65) | corporate profit taxes (H25) |
| corporate profit taxes (H25) | after-tax earnings (H24) |
| after-tax earnings (H24) | capital allocation decisions (G31) |