Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 17, Problem 4E
(a)
To determine
The change in the arbitrage equation with the presence of the investment tax credit.
(b)
To determine
The user cost of capital in the given scenario.
(c)
To determine
The change in the user cost of capital when the investment tax credit and the corporate income tax are equal.
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5. Investment tax credits and the user cost of capital: Consider the user cost of capital in the presence of taxes,
starting with equation (17.5). Suppose the price of capital, pz is constant, so there is no capital-gain term.
What is new, however, is an investment tax credit: rather than costing P; a unit of capital costs (1- ITC)P-
That is, the government subsidizes the purchase of new capital, and the amount of the subsidy is given by
ITC. As just one example, in 1981, the U.S. government created a 10 percent investment tax credit to spur the
economy out of its recession, so we might suppose ITC = 0.10.
1. How does the arbitrage equation change in the presence of the investment tax credit?
2. What is the user cost of capital in this case?
3. What happens to the user cost of capital if the investment tax credit is exactly equal to the corporate
income tax rate? Why?
Chapter 17 Solutions
Macroeconomics (Fourth Edition)
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