Taxation and Corporate Investment: A q-Theory Approach

TLDR

Business capital formation in the United States has declined sharply over the past decade, coinciding with falling stock‑market valuations and significant changes in capital‑income taxation, prompting a consensus that tax incentives may be needed. The study seeks to develop a solid framework for evaluating how different tax policy options affect investment levels and income distribution. The analysis reveals a marked drop in capital formation rates and a steep decline in the market valuation of corporate assets.

Abstract

THE PAST DECADE has witnessed increasing concern over the level of business capital formation in the United States. By some measures there has been a sharp decline in the rate of capital forma:tion, accompanied by a drastic reduction in the stock market's valuation of corporate assets. Measured in 1981 dollars, the Dow Jones average stood at almost 2000 in 1965. This decline in investment and market valuation has occurred in conjunction with the substantial changes in the effective taxation of capital income brought on by inflation. Although causal links among these developments have not been clearly established, a consensus in favor of some sort of tax incentive for business capital formation has emerged. At present, however, there is no solid basis for assessing the likely impact of any given menu of tax policies on the level of investment or on the distribution of income.