The Investment Tax Credit: Effects on Business Capital Formation and Investment Spending

Date of Submission

1981

Document Type

Thesis

Degree Name

Master of Science in Accounting

Department

Accounting

Advisor

Robert Rainish

LCSH

Investment tax credit, Capital investments--Liberia

Call No. at the Univ. of New Haven Library

AS 36 .N29 Acc. 1982 no.7

Abstract

The Investment Tax Credit was first introduced in 1962 when the economy of the Uhited States was dragging behind its potential. This Act was intended to spur the lagging replacement and net additions to capital in order to increase the national economic growth. Revisions in depreciation guidelines were also made to increase business capital formation. Viewed from this angle, the Investment Tax credit and the accompanying revisions in depreciation guidelines were meant to be an incentive to induce capital outlay and promote national economic growth.

Whether the introduction of the investment credit was the best policy at the time for achieving this purpose remain debatable. Moreover, estimates of the effect of this policy vary widely. These and other related questions remain unsettled though the device was suspended for five months beginning in October, 1966 and was repealed at the end of 1969, and reintroduced again in late 1971.

This Thesis was an effort to assess the impact of the Investment Tax Credit and Accelerated Depreciation on the level of investment expenditures and business capital formation. Divided into two parts, Part 1 traced the development of the tax credit including its impact on capital spending as well as its influence on national economic growth. An appreciable cross-section of empirical and other studies done in this direction was surveyed as a basis for our analysis. The conclusion reached was that the investment credit and the accelerated depreciation truly induce the level of investment outlays and give a substantial impetus to business capital formation. However, a more vigorous depreciation policy capable of edging the current rate of inflation is needed to replace the one being used. A one-year system which recovers the cost of a capital equipment in the first year of acquisition was recommended.

Based on the above, Part II discusses the possible application of this policy instrument to Liberia. This was done with the current investment incentives in mind. It was concluded that in spite of initial administrative problems and with a strong, effective and efficient monitoring post the ITC and the accelerated depreciation can play a highly significant role in increasing the level of capital investment and the rate of business capital formation.

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