Investment Tax Incentives and Frequent Tax Reforms.

The article focuses on investment tax incentives and frequent tax reforms. In the uncertain business of planning for U.S. corporate investment, one of the few reliable forecasts one can make is that the tax law will change before any new investment outlives its usefulness. While the Tax Reform Act of 1986 mandates an unusually dramatic reform in the structure of business taxation and the incentive to invest, the simple fact that the U.S. Congress chose to alter in 1986 the tax treatment of new investments is hardly surprising. The willingness, indeed, eagerness, of the U.S. government to amend the rate at which it taxes new investments seems likely to have substantial consequences for investor incentives. By far the bulk of an investor's return comes in years subsequent to the year in which new plant and equipment is put in place. Tax reforms affect investor returns not only by changing the amount of money owed the government, but also by encouraging or discouraging competing future investment and thereby changing levels of before-tax future earnings.