Investment Incentives, Corporate Taxation, and Efficiency in the Allocation of Capital

In an attempt to stimulate aggregate investment, the government may use a variety of investment incentive schemes, including: 1. investment allowances, 2. initial allowances, 3. gross investment tax credits, 4. net investment tax credits, 5. accelerated depreciation, and 6. interest subsidies. Investment allowances and tax credits above regular depreciation are efficient incentives in that they do not distort the allocation of capital over investments of differing durabilities. Initial allowances, tax credits on net investment, tax credits on gross investment which are set against depreciation, and interest subsidies distort investment decisions in favor of longer-lived investments. It is possible that investment incentives favoring long-lived capital would improve the efficiency of the entire system.