Working Paper: NBER ID: w1655
Authors: Don Fullerton
Abstract: Despite much recent interest in a consumption tax, the Treasury Department's November 1984 tax plan proposes to adopt carefully coordinated features of a more comprehensive income tax, including the indexation of interest, depreciation, and capital gains.The May 1985 White House proposal would retain some of these indexing provisions.This paper looks at the incentives under alternative tax regimes to make marginal investments in the corporate sector, noncorporate sector, and in owner-occupied housing. It finds that the current system is characterized by effective tax rates that increase with inflation for some assets and decrease with inflation for other assets. Overall rates fall with inflation, and the corporate tax is completely offset by credits, allowances, and deductions. Under the Treasury or White House plans, the corporate tax re-emerges, effective tax rates are considerably more uniform, and the interference of inflation is virtually eliminated.
Keywords: tax reform; investment incentives; indexation; capital gains; effective tax rates
JEL Codes: H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current tax system (H20) | effective tax rates (H29) |
| inflation (E31) | effective tax rates (H29) |
| current tax system (H20) | investment allocation (G11) |
| treasury proposal (E63) | effective tax rates (H29) |
| treasury proposal (E63) | subsidies to equipment and debt-financed investments (H25) |
| inflation (E31) | corporate tax revenue from marginal investments (H32) |
| corporate tax system (H25) | investment allocation (G11) |