Recent U.S. Investment Incentives


WP/93/92-EA

Recent U.S. Investment Incentives by Christopher M. Towe

Concern that the tax changes adopted during the 1980s contributed to
the secular decline in net investment in the United States led the previous
and current administrations to propose investment tax incentives. Proposals
in the January 1992 budget included a reduction in the capital gains tax,
and those in the February 1993 budget included the reintroduction of an
investment tax credit. The results of a simulation exercise suggest that a
decline of roughly 10 percent in the user cost of producer durables could
have been expected from the administration's February 1993 proposals.

However, empirical study of the 1980s--a period in which changes to the
tax code had even larger effects on the cost of capital--does not support
the conclusion that tax policy was responsible for the decline in investment
demand during the second half of the 1980s. Moreover, simulations of the
1993 budget proposals suggested that although the temporary introduction of
an investment tax credit would have stimulated investment, the increase in
investment would have been largely reversed upon expiration of the tax
credit.