Hidden Stimuli to Capital Formation: Debt and the Incomplete Adjustment of Financial Returns / Robert S. Chirinko, Stephen R. King.

Format:

Book

Author/Creator:

Chirinko, Robert S.

Contributor:

National Bureau of Economic Research.

King, Stephen R.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1684.

NBER working paper series no. w1684

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Hidden Stimuli to Capital Formation

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1985.

Summary:

There is a common belief that the disappointing economic performance in the 1970s can be attributed in good part to the interaction of tax rules, inflation, and capital formation. In this paper, we reassess the relationships between inflation, the tax code, and investment incentives because previous results are based on a number of tenuous assumptions whose impact has not been fully appreciated. We also question the appropriateness of the conventional user cost formulation, and derive an alternative measure taking explicit account of the role of debt -- acquisition,retirement, and net-of-tax interest payments -- and the equity holders' ownership of the firm. Our numerical results show that previously reported disincentives for acquiring capital goods in generaland against longer-lived capital in particular are attenuated, and in a number of cases reversed, under various sets of assumptions. Differences in results stemming from the conventional and modified user costs are highlighted, and are illustrated by a comparison of the U.S. Treasury's tax reform proposals under the two formulations.

Notes:

Print version record

August 1985.