Fiscal Policies Aimed at Spurring Capital Formation: A Framework for Analysis
نویسنده
چکیده
In recent years, policymakers have proposed various fiscal policies to spur long-run economic growth through increased capital formation. The Bush Administration, for example, proposed lowering the capital gains tax rate. The Clinton Administration, among other measures in its economic package, proposed reinstituting the investment tax credit. These proposals stem from heightened concerns that the U.S. economy has been growing by less than its long-run potential, and from the judgment that this subpar growth is due in part to deficient capital formation. This article presents a framework for examining fiscal policies aimed at spurring capital formation and highlights the conditions for their success. The first section shows why capital formation is an important determinant of economic growth. The second section shows how the optimal amount of capital formation, and therefore economic growth, is determined. The third section shows how economic distortions can cause capital formation to fall short of the socially optimal amount. The final section discusses several fiscal policies that have been proposed to raise capital formation.
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