A Box-Jenkins time-series interruption analysis concerning United States federal tax policy: An empirical examination of the investment tax credit

Although originally envisioned as a permanent component of federal tax law, the investment tax credit (ITC) has been far from immutable. Initially codified in 1962, the credit was suspended during 1966 and reinstated the following year; it was repealed in 1969 and reincarnated during 1971; a rate increase (seven to ten percent) was enacted in 1975 and further magnified with the shortened depreciable lives of 1981; and most recently, the ITC was repealed for a second time as part of the massive Tax Reform Act of 1986. Unquestionably, Congress discerns some macro-economic benefit from recurring modifications to this tax policy. The foundation for this Congressional conviction rests, first and foremost, upon effectiveness of the various policy choices--ineffective policy can not be constructive. To investigate the effectiveness issue, this experiment undertook univariate Box-Jenkins time-series intervention analyses for three of the federal tax policy alternatives surrounding the ITC: enactment (1962, 1971), rate increase (1975, 1981), and repeal (1969, 1986). The investigation focused on the relationship between the ITC and investments in fixed assets via consideration of monthly order data obtained from the United States Department of Commerce and Bureau of the Census. Two acquisition time-series were assessed at the effective month for each policy variation. The first order series consisted of commitments for assets qualifying for the ITC; the second order series consisted of commitments for assets not qualifying for the ITC. Dichotomous groups facilitated examination of the subject relationship while affording a limited degree of control over exogenous economic and tax variables. The findings of this study support positive effects for the enactments (1962, 1971) and for the actual rate increase (1975); negative effects are attested for the repeals (1969, 1986). No support was manifested for a positive effect concomitant with codification of the Accelerated Cost Recovery System of depreciation (1981). It was concluded, therefore: Ceteris paribus, tax policy respecting the ITC has been efficacious in modifying targeted investment behavior