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Tax Changes and Capital Allocation in the 1980s

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  • Patric H. Hendershott

Abstract

The paper begins with presentation of a methodology for computing rental costs of capital under any tax regime.Tax law over the 1980-84 period is specified and the provisions of theTreasury and Administration tax reform proposals and HR 3838 are described. A model is then constructed to allow calculation of the impact of changes in tax regimes and/or expected inflation on interest rates and the allocation of real capital. The model allocates a fixed private capital stock among various classes of nonresidential and residential capital, depending upon the rental costs for the capital components, the price elasticities of demand with respect to the rental costs, and the elasticities of homeownership with respect to the cost of owning versus renting. The interest rate adjusts in response to tax/inflation changes so as to maintain the aggregate demand for capital at this initial level.The model is employed to deduce the efficiency of the allocation of real capital under various tax regimes at different inflation rates.

Suggested Citation

  • Patric H. Hendershott, 1986. "Tax Changes and Capital Allocation in the 1980s," NBER Working Papers 1911, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1911
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    1. Follain, James R. & Hendershott, Patric H. & Ling, David C., 1992. "Real Estate Markets Since 1980: What Role Have Tax Changes Played?," National Tax Journal, National Tax Association;National Tax Journal, vol. 45(3), pages 253-266, September.
    2. Dietz, Robert D. & Haurin, Donald R., 2003. "The social and private micro-level consequences of homeownership," Journal of Urban Economics, Elsevier, vol. 54(3), pages 401-450, November.
    3. Lawrence White, 2003. "Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 23(1), pages 43-58, February.
    4. James M. Poterba, 1992. "Taxation and Housing Markets," NBER Chapters, in: Canada-U.S. Tax Comparisons, pages 275-294, National Bureau of Economic Research, Inc.
    5. Lawrence White, 2002. "Reforming Fannie and Freddie: Privatization is the Way," Working Papers 02-10, New York University, Leonard N. Stern School of Business, Department of Economics.

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