BUSINESS INVESTMENT AND TAX POLICY: A PERSPECTIVE ON EXISTING MODELS AND EMPIRICAL RESULTS

Abstract

This critical review endeavors to serve as an introduction to the voluminous literature on econometric investment models with special emphasis on the role of tax policy. The two most frequently utilized investment specifications—the Neoclassical model of Jorgenson and the Q model of Tobin—are given explicit consideration and, for each model, the underlying theory, available empirical results, and appropriate caveats are discussed. The paper also provides a brief review of the Return-Over-Cost and Effective Tax Rate models of Feldstein and of the Unobserved Shadow Price model. An organizing framework is provided by focusing on two key elements characterizing each of the four models—the formulation of the expected marginal benefits and costs of acquiring capital, and the relationship between these unobservable expectations and observable variables.

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