Treasury proposal will increase, not decrease, investment

by Don Henry, William B. Trautman

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This paper considers the impact on capital investment of the Treasury tax reform proposal that would eliminate the investment tax credit, lengthen the write-off periods for capital goods, and index the write-offs to inflation. The authors argue that the assertion by business groups that the proposal would reduce investment is erroneous because it only considers the impact of the cost of capital, and therefore ignores an important factor: the higher after-tax cost of capital must be balanced against the higher after-tax revenue from capital. They find that the Treasury proposal would actually increase the incentives for most categories of capital investment when compared to the present tax law.

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