General-equilibrium effects of investment tax incentives

Rochelle Edge () and Jeremy B. Rudd
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Jeremy B. Rudd: https://www.federalreserve.gov/econres/jeremy-rudd.htm

No 2010-17, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Investments; Taxation (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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