Investment Tax Credit:

Unresolved Issues

PAD-78-40: Published: May 8, 1978. Publicly Released: May 8, 1978.

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In an effort to stimulate economic growth, the administration proposed that the temporary 10-percent investment credit be made permanent and extended. Previous studies of investment behavior were evaluated to determine the role of the investment tax credit in promoting stability and growth.

Since 1962, when the investment tax credit was enacted, gross private domestic investment as a percentage of the nation's economic output has not changed appreciably. Two areas of concern regarding the level of investment spending are shortrun economic recovery and future productivity gains. Studies revealed that: (1) about 2 to 4 years is required for a significant response in investment expenditures to tax credit changes; (2) a large portion of the credit goes to reward investment that would have been made whether or not there was such a credit; (3) the major thrust of the credit is to provide incentive to long-term economic growth; and (4) the credit encourages investment in new, more productive equipment and encourages a greater proportion of capital investment in equipment. However, the credit may distort normal market forces and lead to more intensive use of capital at the expense of labor, affect rates of return on assets, allow additional tax writeoffs, and bypass businesses which do not require large capital investments. Two studies suggested that the method of financing the credit may lead to changes in capital costs, in redistribution of wealth, and in consumer behavior.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: Congress should consider the investment tax credit primarily as a tool to promote capital formation and economic growth in the long run and consider the following possible changes: (1) applying the credit to other types of investment such as structures and work force training; (2) making the credit available to firms currently making small profits but growing rapidly; and (3) further research and analysis on the effectiveness of the credit as an economic stabilization device.

 

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