Investment Ramifications of Distortionary Tax Subsidies

James Hines

No 6615, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the investment effects of tax subsidies for which some assets and not others are eligible. Distortionary tax subsidies encourage firms to concentrate investments in tax-favored assets profitability of investment and reducing payoffs to bondholders in the event of default. Anticipation of asset substitution makes borrowing more expensive, which in turn discourages investment. Borrowing rates react so strongly that aggregate investment may rise very little, or even fall, in response to higher tax credits. Observed positive corporate bond market reactions to events surrounding passage of the U.S. Tax Reform Act of 1986 are consistent with the model's implications.

JEL-codes: G31 H25 (search for similar items in EconPapers)
Date: 1998-06
New Economics Papers: this item is included in nep-pub
Note: PE
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Published as Investment Ramifications of Distortionary Tax Subsidies, James R. Hines Jr., Jongsang Park. in Business Taxation (Trans-Atlantic Public Economics Seminar) , Devereux and Gordon. 2014
Published as Hines, James R. & Park, Jongsang, 2019. "Investment ramifications of distortionary tax subsidies," Journal of Public Economics, Elsevier, vol. 172(C), pages 36-51.

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Journal Article: Investment ramifications of distortionary tax subsidies (2019)
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