Impact of Investment Subsidies in a Neoclassical Growth Model

SINCE 1953, Congress has enacted several changes in the income tax laws which provide subsidies to investment. Depreciation rules were amended in 1954 to allow taxpayers to use various "accelerated" depreciation methods, such as sum of the years digits or double declining balance, as a substitute for straight line depreciation. In 1962 the tax laws were changed to shorten the lives over which assets could be depreciated, and to provide a tax credit on investment in equipment. The 1954 acceleration and the tax credit were suspended in 1966 and reimposed in 1967. Although these subsidies have been incorporated in many econometric and theoretical studies of investment behaviour, the latter have been concerned exclusively with the partial equilibrium impacts on investment and on the interaction between investment and income in a short-run Keynesian framework.' Partial equilibrium effects are certainly of interest and the use of these subsidies for countercyclical purposes has been emphasized by recent policy decisions. However it should be recalled that one of the major reasons for instituting these policies was to stimulate economic growth. Consequently in this paper an attempt is made to analyse in a general equilibrium context the long-run steady state implications of investment subsidies in general, and of the tax credit and of a change in depreciation methods in particular. Of course this method ignores all problems arising from cyclical fluctuations in aggregate demand.