Journal of Economic Perspectives: Vol. 7 No. 2 (Spring 1993)


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Policy Watch: Designing an Effective Investment Tax Credit

Article Citation

Meyer, Laurence H., Joel L. Prakken, and Chris P. Varvares. 1993. "Policy Watch: Designing an Effective Investment Tax Credit." Journal of Economic Perspectives, 7(2): 189-196.

DOI: 10.1257/jep.7.2.189


The investment tax credit (ITC) allows firms to reduce their tax liability by an amount related to their expenditures on equipment, and thus reduces the cost of acquiring capital. An investment tax credit can be introduced temporarily to stimulate investment as part of a countercyclical fiscal policy or permanently as part of a strategy to enhance capital formation, raise labor productivity, and so speed longer-term economic growth. The discussion in this paper will focus mainly on the permanent ITC, although it will include some comments on the temporary version. As this paper is being written, President-elect Bill Clinton is widely expected to propose an ITC (of some sort) to Congress soon after taking office. Since the federal deficit continues to constrain fiscal policy, attention has been focused on designing an ITC that delivers the greatest stimulus per dollar loss of revenue.

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Meyer, Laurence H. (Washington U and Laurence H. Meyer & Associates)
Prakken, Joel L. (Laurence H. Meyer & Associates)
Varvares, Chris P. (Laurence H. Meyer & Associates)

JEL Classifications

H32: Fiscal Policies and Behavior of Economic Agents: Firm
H25: Business Taxes and Subsidies including sales and value-added (VAT


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