Variable ~n~es~men~ Credit?

The United States adopted a flat-rate 7 percent investment tax credit in the Revenue Act of 1962 to induce higher rates of new capital investment. The underlying purposes were to stimulate the economy and increase its rate of growth in real terms, to reduce unemployment and to make American industry more competitive with foreign firms. Although enacted as a "permanent" credit, certain changes were made in 1964 and the credit was suspended in 1966 only to be reinstated early in 1967. More recently, the credit was again suspended in 1969, but was reenacted as a "Job Development Credit" in 1971 and continues in effect as a flat-rate credit. This on-again, off-again history of the "permanent" flat-rate credit has increasingly led to suggestions that the existing instrument, originally designed for economic stimulation, be redesigned as an explicitly variable investment tax credit for purposes of economic stabilization. Instead of either being allowed at fixed rate or completely suspended, as with the present credit, the level of the new variable investment tax credit allowed could be varied from time to time within a wider band of rates in response to varying conditions and prospects of the economy. In several major addresses over the past year, for instance, Arthur Burns has proposed that Congress .enact new legislation delegating authority to initiate changes in the investment tax credit, between a lower limit of zero and a maximum rate of perhaps 15 percent, subject to modification or disapproval within 60 days by either house of Congress. Such legislation is now pending in Congress. There are several important reasons why a variable investment tax credit (VITC) scheme merits serious consideration for inclusion as one of the instruments in a well designed policy for economic stabilization. Experience over a quarter of a century has well documented