Williamson LO 3 The government wishes to bring about an increase in investment e

Question

Williamson LO 3 The government wishes to bring about an increase in investment expenditures, and is con- sidering two tax policies that policymakers think could bring this about. Under the first tax policy firms would receive a subsidy in the current period of t per unit of current output produced. Policy makers reason that firms will use this subsidy for investment. The second policy under considera tion is an investment tax credit, by which firms would receive a subsidy of s per unit of investment in the current period. Determine which tax policy would be more effective in accomplishing the gov- ernment's 'goal of increasing current investment expenditures, and carefully explain your results

Explanation / Answer

If we look at both the tax policies of the government, the second policy seems to be more effective in which the firms will receive the subsidy of s per unit of investment in the current period. The main logic behind this argument is that this is a direct incentive to the firms to invest in the economy as they will have the subsidy. While in case of the first policy, the government is hoping that subsidy given on the production will be used in investment which may not be the case as it is an assumption rather than the express condition to receive the subsidy. While in case of second policy, there is an expressed condition that the firs will receive the subsidy only when they invest the money. Thus the second policy will boost the investment scenario in the economy.

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