Monday

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 26 of 36 Saving, Investment, and the Financial System
Section 21 of 25
…
Figure 3 - Investment Incentives Increase the Demand for Loanable Funds
Results of passage of an investment tax credit by government:
· encourages firms to invest more
· the demand for loanable funds increases
· the equilibrium interest rate rises
· the higher interest rate stimulates saving
On Figure 3:
-1- an investment credit causes the demand curve to shift from D1 to D2
-2- the equilibrium interest rate rises from 5 percent to 6 percent
-3- the equilibrium quantity of loanable funds saved and invested rises from $1,200 billion to $1,400 billion
…
Three government policies that affect the economy's saving and investment:
Policy 1: saving incentives
Policy 2: investment incentives
Policy 3: government budget deficits and surpluses
…
Policy 2: Investment incentives
Congress sometimes passes tax reform measures aimed at making investment more attractive.
This is typically an investment tax credit, making the after tax net cost of an investment in equipment or other capital assets lower.
…
Figure 3 shows the effect of such a tax credit on the market for loanable funds.
We analyze the tax credit following our three steps
1 - determine whether the policy shifts the supply curve or the demand curve
2 - determine the direction of the shift
3 - determine how the equilibrium changes using the supply-and-demand diagram
…
1 - Determine whether the policy shifts the supply curve or the demand curve
Because the tax credit rewards firms that borrow and invest in new capital it would alter incentives for investment.
This alters the demand for loanable funds changes, shifting the demand curve.
The tax credit doesn’t directly affect the amount households want to save at any interest rate.
…
2 - Determine the direction of the shift
Firms now have an incentive to increase investment.
The quantity of loanable funds demanded is higher.
The loanable funds demand curve moves to the right, from D1 to D2.
…
3 - Determine how the equilibrium changes using the supply-and-demand diagram
The increased demand for loanable funds causes a rise in the interest rate from 5% to 6%.
Households respond to the new higher interest rate by increasing the amount they save.
…
The end results of the tax credit are
· the quantity of loanable funds demanded (invested) and supplied (saved) from $1,200 billion to $1,400 billion
· the interest rate rises from 5% to 6%
… …
companies have an incentive to increase investment
kigyō wa tōshi o fuyasu insentibu ga aru
企業は投資を増やすインセンティブがある
… …
What investment tax credits and other investment incentives has the U.S. federal government initiated since President Trump took office in 2025? ChatGPT:
The most important investment-related tax provisions have been:
-Permanent 100% Bonus Depreciation (2025) — Businesses can immediately deduct the full cost of many qualifying investments in equipment, machinery, and certain other assets rather than depreciating them over several years. This is a powerful investment incentive, though it is a deduction rather than a tax credit.
-Permanent Full Expensing of Domestic Research and Development Costs (2025)
Businesses can immediately deduct qualifying domestic R&D expenditures instead of amortizing them over multiple years.
Like bonus depreciation, this encourages investment but is a deduction rather than a tax credit.
-Extension and Modification of Opportunity Zones (2025)
The law extended and revised the Opportunity Zone program, which provides tax benefits for investments in designated economically distressed areas.
-Extension of the New Markets Tax Credit (2025)
Congress continued support for this existing program, which encourages private investment in low-income communities through tax credits.
-Restrictions and Phaseouts of Existing Clean-Energy Investment Credits (2025)
Rather than creating new major investment tax credits, Congress modified and in some cases accelerated the phaseout of credits created under the Inflation Reduction Act, including the Clean Electricity Investment Tax Credit (Section 48E) and related programs.