Accession Number:

ADA159569

Title:

Treasury Proposal Will Increase, Not Decrease, Investment,

Descriptive Note:

Corporate Author:

RAND CORP SANTA MONICA CA

Personal Author(s):

Report Date:

1985-03-01

Pagination or Media Count:

9.0

Abstract:

One of the most controversial aspects of the Treasury tax reform proposal is the tax treatment of capital investment the investment tax credit is eliminated, the write-off periods for capital goods are lengthened, and these write-offs are indexed to inflation. Numerous business groups claim that the Treasury proposal, if adopted, would reduce investment which would depress economic activity and slow growth. The Treasury proposal would actually increase the incentives for most categories of capital investment when compared to present tax law. When a corporation buys a capital asset, it receives two tax benefits. First, it can write off the cost of the machine over time against its income, reducing its tax payments. Second, it might receive an investment tax credit up to 10 of the cost of the asset which further reduces its taxes. According to our calculations, a three-year asset that sells for 100,000 costs a corporation 60,000 in after-tax dollars under current law. The Treasury proposal extends the period over which a capital asset must be written off and tosses out the investment tax credit. Corporations do not invest in capital equipment solely for the tax benefits that the investment provides. A more appropriate concept than the after-tax cost of capital is the before-tax revenue required to justify an investment project.

Subject Categories:

  • Administration and Management
  • Economics and Cost Analysis

Distribution Statement:

APPROVED FOR PUBLIC RELEASE