Investment Tax Credit Reconsidered

In this brief, Thomas Karier explores the efficacy of the investment tax credit (ITC) in stimulating private investment spending. He notes that there are three possible channels through which an ITC can act on investment: price, income, and multiplier effects. He finds that ITCs do not appear to have had a significant effect on equipment investment; that the effects of a decline in corporate tax rates (the income effect) were distributed among increased dividends and fewer equity and debt issuances and had little influence on investment; and that capacity utilization and real GDP growth were the only business cycle variables that had a significant effect on equipment investment growth. Based on these findings, Karier concludes that alternatives to tax investment credit programs must be found and pursued. He suggests undertaking a modest program of direct public investment financed by rearranging spending priorities within the budget; a more expansive program could be financed through additional borrowing or through an increase in the corporate income tax.