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Business Investment, Cycles and Tax Policy: Are We Investing Too Little?

By John Tatom

Abstract

Some analysts have argued that bubble excesses of the late-1990s led to excessive real investment, and that an important consequence was that capital formation has been depressed since then, as firms have let production catch up with the excessive capital stock. While this description broadly fits the pattern of business fixed investment from the mid-1990s at least until 2003, it may be overstated. The business cycle and tax policy have played more important roles in explaining the pattern of investment activity. The resumption of investment, so long as tax policy changes in 2003 are maintained, suggests the excess capacity argument is no longer valid, if it ever was.Tax policy and investment; business cycle and investment

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