The purpose of this proposal is to apply a general equilibrium model designed to assess the effects of US tax policies aimed at encouraging investment. This model will be applied in an open economy context which will account for the interactions between the U.S. economy and the rest of the world. An important innovation in this research is that particular attention will be paid to the international flows of financial capital and the international cross-ownership of capital stocks. Two main types of policies will be examined. One type involves policies aimed at the promotion of domestic savings. These policies include proposals to base the individual income tax more exclusively on consumption. The second type emphasizes the promotion of domestic investment. These policies include tax credits for investments in domestic plant and equipment, and reductions in statutory U.S. corporate income tax rates. The various policy options will be analyzed along a number of dimensions including effects on domestic and foreign welfare; on saving and investment by domestic and foreign households; on the size, ownership, and industrial allocation of the U.S. capital stock; and on the trade balance and other components of the balance of payments.
