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Evaluating the Macroeconomic Effects of a Temporary Investment Tax Credit

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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 in the quarter that the policy is implemented. In subsequent quarters, the output growth effects are negligible. As the subsidy ends, output growth falls 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.

Suggested citation: Gomme, Paul, 2002. "Evaluating the Macroeconomic Effects of a Temporary Investment Tax Credit" Federal Reserve Bank of Cleveland, Policy Discussion Paper no. 02-03.

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