Tax Neutrality and the Investment Tax Credit

18 Pages Posted: 5 Jul 2004 Last revised: 28 Sep 2022

See all articles by David F. Bradford

David F. Bradford

Princeton University, Woodrow Wilson School; NBER; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 1978

Abstract

This paper concerns the question of how the rules for calculating the investment tax credit and the associated rules for calculating depreciation allowances for tax purposes should be structured to assure the "appropriate" relationship between the subsidy granted to long-lived assets and that to short-lived assets. The increasing rate of tax subsidy under the investment credit favors long-lived assets by comparison with a flat-rate credit, while the neglect of the credit in calculating depreciation allowances favors short-lived assets (for which the depreciation allowance is a more important element in the cash flow). In reviewing the literature on this issue, Emil Sunley focused on the question of whether the investment credit should vary with the durability of the asset purchased. He concluded that neutrality requires a subsidy rate increasing with the useful life of the asset in a way qualitatively similar to that prescribed in present U.S. law. This paper develops Sunley's discussion through the use of simple formal models of the yield from investment.

Suggested Citation

Bradford, David F., Tax Neutrality and the Investment Tax Credit (July 1978). NBER Working Paper No. w0269, Available at SSRN: https://ssrn.com/abstract=260464

David F. Bradford (Contact Author)

Princeton University, Woodrow Wilson School ( email )

Department of Economics
Princeton, NJ 08544-1021
United States
609-258-1856 (Phone)
609-258-2809 (Fax)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
47
Abstract Views
925
PlumX Metrics