Working Paper: NBER ID: w2492
Authors: Alan J. Auerbach; James R. Hines Jr.
Abstract: Despite the frequency of tax changes and their potential importance to investors, almost all of the analysis of tax-based investment incentives assumes investors never anticipate any tax changes. We depart from this approach by analyzing the historical pattern of U.S. corporate investment incentives over the period 1953-86, incorporating the feature of investor awareness that the tax code may change. Our analysis incorporates a predictive equation for future tax variables into a model of optimal investment subject to adjustment costs and uncertainty. We find that expectations of future tax changes significantly affect the incentive to invest only if adjustment costs are low. In this case, the incentive to invest in 1986 was strong, as investors are estimated to have anticipated the coming reduction in investment incentives.
Keywords: investment tax incentives; tax reforms; corporate investment
JEL Codes: 320; 520
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Future tax changes (H29) | Investment incentives (G31) |
| Lower adjustment costs (D23) | Investment incentives (G31) |
| Tax reforms (H29) | Returns on capital (D33) |
| Returns on capital (D33) | Investment incentives (G31) |
| Government's choice of tax variables (H29) | Investor behavior (G41) |
| Investor anticipation of tax changes (H32) | Investment decisions (G11) |