Tax Expenditures and Results of Study on Investment Tax Credit

The investment tax credit has been estimated to represent a revenue loss of over $19 billion for fiscal year 1980. A disadvantage of the investment tax credit is that it does not actually generate additional investment, since many of the investments for which credit is claimed would have been made without the credit. In assessing the desirability of the investment tax credit as an incentive for business investment, the following alternatives should be considered: (1) a program of direct investment subsidies to businesses in the form of direct payments, loans, or loan guarantees; (2) a general cut in the corporation income tax; and (3) a more generous depreciation allowance for business. The disadvantages of these alterantives are: (1) a direct program would produce intrusive government involvement in the private decisionmaking process; (2) a general reduction in business taxes may not have a measurable effect upon investment in productive capacity as opposed to simply increasing dividends; and (3) depreciation deductions spread the investment subsidy over a number of years and favor large corporations and high-income individuals. In summary, it appears that, although the investment tax credit has deficiencies, at this time the credit compares favorably with major alternatives. More research and studies are needed to determine the real effectiveness of the investment tax credit.