General-Equilibrium Effects of Investment Tax Incentives

Rochelle M. Edge and Jeremy B. Rudd

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper develops a new-Keynesian model with nominal depreciation allowances to consider the effects of temporary tax-based investment incentives on capital spending and real activity. In particular, we investigate the effects of a temporary expensing allowance on investment in partial and general equilibrium and challenge the conventional view, advanced by Auerbach and Summers (1979) and Judd (1985), that partial-equilibrium analyses overstate the calculated impact of such policies. We also explore two additional questions. First, we investigate a claim noted by Auerbach and Summers and analyzed by Christiano (1984) that such incentives can be destabilizing. Second, we consider the relative impact of two types of tax-based investment incentives: a temporary partial-expensing allowance and a temporary reduction in capital taxes.

JEL-codes: E10 E17 E22 E63 H25 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2010-02
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2010-03

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