Concern that the tax changes adopted during the 1980s contributed to the secular decline in net investment in the United States led the previous and current administrations to propose investment tax incentives. Proposals in the January 1992 budget included a reduction in the capital gains tax, and those in the February 1993 budget included the reintroduction of an investment tax credit. The results of a simulation exercise suggest that a decline of roughly 10 percent in the user cost of producer durables could have been expected from the administration’s February 1993 proposals.
However, empirical study of the 1980s--a period in which changes to the tax code had even larger effects on the cost of capital--does not support the conclusion that tax policy was responsible for the decline in investment demand during the second half of the 1980s. Moreover, simulations of the 1993 budget proposals suggested that although the temporary introduction of an investment tax credit would have stimulated investment, the increase in investment would have been largely reversed upon expiration of the tax credit.