EFFECTS OF TAX POLICY ON INVESTMENT IN MANUFACTURING.

Tax incentives for investment have been in vogue in the U.S. since 1954 when firms were granted the opportunity to accelerate depreciation for tax purposes through use of the declining balance and sum-of-years-digits depreciation methods. More recently, firms have benefited from the 1 percent investment tax credit incorporated in the Revenue Act of 1962, the reductions in equipment lives for tax purposes permitted under the Treasury Department's Revenue Procedure 62-21, released in July, 1962, and the tax rate reductions provided by the Revenue Act of 1964. The purposes of this article is to determine the magnitude of the tax savings that manufacturing firms have enjoyed as a result of these policies and to determine the impact of tax incentives on plant and equipment expenditures in manufacturing. Tax incentives are thought to stimulate capital expenditures in two ways. First, by reducing the amount of taxes that must be paid on income from assets, or by changing the timing of the tax payments in favor of the future, tax incentives increase the after-tax rate of return on capital. Second, by reducing tax liabilities, tax incentives increase a firm's cash flow which is one measure of internal funds available for investment and is thought by some to be an important determinant of investment expenditures.