Long-Run Effects of the Accelerated Cost Recovery System

Abstract

This paper represents part of a larger ongoing project to build and use a numerical general equilibrium model of the U.S. tax system. Charles Ballard, Charles Becker, Larry Dildine, Hudson Milner, John Shoven, and John Whalley have not only participated in the construction of this model, but have also made substantial contributions to this paper. We are also grateful for helpful suggestions and data from Barbara Fraumeni, Jane Gravelle, Charles Hulten, Dale Jorgenson, and Martin Sullivan. We are grateful to Thomas Kronmiller for research assistance, to the Treasury Department's Office of Tax Analysis for financial assistance, and to the National Science Foundation for financial assistance under Grant No. SES80254O4. Any opinions, findings, and conclusions expressed in this publication are those of the authors and do not necessarily reflect the views of the Office of Tax Analysis, the NEER, or the National Science Foundation. The research reported here is part of the NBER's research program in Taxation and project in Capital Formation. NBER Working Paper #828 December 1981 Long Run Effects of the Accelerated Cost Recovery System AB STRACTNuch of the debate surrounding the enactment of President Reagan's tax plan was concerned with the short rim effects of macroeconomic stimulation. Now that the Economic Recovery Tax Act of 1981 has become law, it is appropriate to look again at the long run effect of these tax cuts. This paper measures, for 37 different assets and for 18 different industries, the reduction in effective corporate tax rates that result from the acceleration of depreciation allowances and the expansion of the investment tax credit. It also uses a detailed dynamic general equilibrium model of the U.S. economy to simulate the effects of the new Accelerated Cost Recovery System (ACRS) on revenues, investment, long run growth, and capital allocation among industries. 1e find significant welfare gains from ACRS, but we find larger welfare gains from alternative plans that were not adopted.

Depreciation Profiles and Depreciation Policy in a Spatial Context*

“…As important, the level of effective tax rates has been reduced; the unweighted average under the 1981 Accelerated Cost Recovery (ACR) system is 20.5 percentage points below what it was under the ADR system. Similar though less dramatic results are reported by Jorgenson and Sullivan (1981), Fullerton and Henderson (1981), and Hulton and Wykoff (1981a). Those authors also show that, because of differences in asset composition, sectors' and industries' effective tax rates differ markedly under the 1981 laws, and that those too are considerably lower than in earlier years.…”

“…Those authors also show that, because of differences in asset composition, sectors' and industries' effective tax rates differ markedly under the 1981 laws, and that those too are considerably lower than in earlier years. Fullerton and Henderson (1981), for example, estimate that Accelerated Cost Recovery leads to a range in effective tax rates from 0.131 in the transportation, communications, and public utilities sector to 0.432 in agriculture, forestry, and fisheries." Jorgenson and Sullivan (1981) show the range to be even larger, especially for manufacturing industries.…”

Measuring the Burden of the Corporate Income Tax Under Imperfect Competition

“…We obtain asset level e¤ective tax rates (ET R at ) from Fullerton and Henderson (1985) and Mackie (2002). Both papers follow the Hall-and-Jorgenson cost-of-capital approach and compute the e¤ective marginal corporate tax rates for 34 types of investment in equipment and nonresidential structures.…”

“…Cross-time variation in e¤ective tax rates comes from two sources: changes in the tax system due to the Tax Reform Act of 1986 (TRA86) and changes in macroeconomic conditions re ‡ected in the real interest and in ‡ation rates. 8 The tax rates in Fullerton and Henderson (1985) are calculated for 1982 while those in Mackie (2002) are calculated for 1992 and 1997. Both before and after TRA86, there is variation in e¤ective tax rates across assets as a result of di¤erences in depreciation schedules.…”

A Disaggregate Equilibrium Model of the Tax Distortions Among Assets, Sectors, and Industries

“…When these elasticities are set to zero, our model reduces approximately to the fixed-coefficient model in Fullerton and Henderson (1985). When they are unity, the model is similar to those of Gravelle (1981) and Auerbach (1983).…”