Discussion Paper

Evaluating the macroeconomic effects of a temporary investment tax credit

Abstract: As part of a fiscal stimulus package, some members of Congress have recently proposed a temporary investment subsidy. This paper uses the neoclassical growth model to evaluate the likely macroeconomic effects of such a subsidy. The model predicts a 0.8 percentage point increase in output growth for the quarter in which the policy is implemented. In subsequent quarters, the output growth effects are negligible. As the subsidy ends, output growth falls by 1 percentage point before returning to its trend growth rate. While a permanent subsidy will lead to more capital deepening in the long term, it also represents a permanent fall in government revenues. Under a temporary subsidy, there is less capital deepening but the decline in government revenues is likewise more modest.

Keywords: Fiscal policy; Tax credits;

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Policy Discussion Papers

Publication Date: 2002

Issue: Jan

Order Number: 3