Deficits, Interest Rates, And the User Cost of Capital: A Reconsideration of the Effects of Tax Policy on Investment (35Th Annual Spring Symposium and State Tax Program‪)‬

INTRODUCTION One of the principal goals of tax reform efforts is to improve the long-run performance of the economy. A frequently observed manifestation of this goal is the provision of tax incentives for firms to boost productive investment in equipment and structures. Traditionally, the effects of tax policy on firms' demand for investment are summarized in estimates of the "user cost of capital." The user cost of a capital investment is the minimum return a firm needs to cover depreciation, taxes, and the opportunity costs of the funds used to finance the project (Jorgenson, 1963; Hall and Jorgenson, 1967; Auerbach, 1983b). Lower user costs typically translate into higher investment levels.