Tax Incentives and Economic Growth

By Barry P. Bosworth | Go to book overview

CHAPTER THREE
Saving and Private Capital Formation

IF AN INCREASE in the nation's rate of capital formation is accepted as a major goal of economic policy, significant disagreements remain about how best to achieve that objective. The conflicts in public policy are particularly evident in the tax area, where major new initiatives have been taken to expand incentives for both private saving and investment. The effects of those tax actions on private saving and investment decisions are highly debatable. In addition, the government has encountered severe difficulties in integrating its program for expanding capital formation with other goals of economic policy. For example, the failure during the early 1980s to agree on how to cut expenditures to match previously scheduled tax reductions has created major budget problems, with the result that any induced rise in private saving will almost certainly be offset by increased government dissaving.


Major Issues

Several issues are central to the continuing discussion of policies to expand capital formation. First, should government policies focus on expanded incentives for saving or for investment? In an idealized world of full employment, competitive markets, and no foreign trade, such a distinction would have little relevance. Saving and investment could be viewed as opposite sides (supply and demand) of the same market, with the interest rate serving as the equilibrating price. It would make little difference whether tax incentives were extended to savers or to investors, since the interest rate would adjust to maintain a balance.

In practice, there are many pitfalls in this process. To begin with, the question of an adequate saving rate to support a specific level of investment is relevant only to a fully employed economy in which resources for increased investment must be obtained by forgoing private

-59-

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Tax Incentives and Economic Growth
Table of contents

Table of contents

  • Title Page iii
  • Foreword vii
  • Contents ix
  • Chapter One - the Supply-Side Debate 1
  • Chapter Two - the Role of Capital Formation 23
  • Summary 55
  • Chapter Three - Saving and Private Capital Formation 59
  • Summary 94
  • Chapter Four - Investment Demand and Its Relation to Saving 97
  • Summary 127
  • Chapter Five - Labor Supply 130
  • Summary 172
  • Chapter Six - Implications for Economic Policy 177
  • Index 205
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