Review of Report Concerning Investment Tax Credit

Gao ID: PAD-80-3 January 18, 1980

GAO reviewed a Department of the Treasury report concerning the effect of the investment tax credit on competition in the automobile industry. The analysis contained in the report was an adequate effort to use data from company tax returns to clarify the effect of the credit on competition. Because of the unique structure of the automobile industry, these findings can not be generalized to other industries. One cannot tell whether the investment tax credit stimulates or depresses competition. Healthy firms earning good profits can benefit more from the investment tax credit than financially troubled firms, or firms that are beginning business. The credit may help successful firms expand their share of the market by allowing them to enlarge their productive capacity or to replace old equipment at a lower cost. It might provide different benefits to firms that prefer using different relative amounts of capital and labor. GAO does not know whether capital intensity differs systematically between large and small firms in the automobile industry. The success of imported cars in the U.S. market was not considered in the Treasury report, nor was the effect of different degrees of vertical integration on competition. Highly integrated firms will have a higher ratio of capital assets to sales than firms that purchase components. GAO suggested alternative study approaches, but while urging that the competitive impact of the investment tax credit be analyzed using an economic model, GAO recognized that the model would not answer all questions. It could provide a framework for any detailed analysis undertaken by the Treasury. An unequal distribution of benefits from the investment tax credit may be inherent in the law, the structure of the industry, and in differences among firms within the industry. While this unequal distribution of benefits may adversely affect industry competition, it may also be an essential feature of a credit that stimulates the most productive investments. Changes in the investment tax credit that are intended to foster competition may weaken the investment stimulus, a loss that policymakers may be unwilling to accept. Methods other than tax policy may offer more appropriate means of encouraging competition.

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