Tax Income in the United State and the United Kingdom - Dissertation Example

The objective of the present paper is to utilize co-integration techniques to estimate a particular model of investment. In particular, we are interested in exploring the empirical validity of the acceleration principle. The fundamental contribution of this paper is twofold. First, we shall utilize the co-integrated nature of the data. Additionally, we shall use this model to examine the similarities and dissimilarities in US and UK investment trajectories and their determinants. Since investment is a key macroeconomic variable for growth and development, the inherent motivation is to derive instructive results that are relevant to macroeconomic policy formulation.

The paper is structured as follows: in section 1 we do a literature review of the theories and empirical work on investment. In particular, we initiate the discussion by looking at the Keynesian ideas regarding investment. Then we shall look at the advances in the literature since then. In the subsequent sections, we shall evaluate the performance of the models in regards to US data and then UK data using co-integration, error correction, and differencing techniques. Finally, the last section will summarize the findings and conclusions.

The central feature of the neoclassical renaissance post-1870 was the distribution theory based upon marginalist principles (Fisher, 1930; Marshall, 1890; Walras, 1874). Essentially the theory implies a negatively sloped demand for capital. The idea was that entrepreneurs would go on increasing capital as long as the value of the return from the investment was above the interest rate they would have to pay for it. This theory was further refined by Jorgenson (1963) who showed the importance of considering the user-costs or rental price of capital.

The user cost of capital includes depreciation as well as taxes in along with the real rate of interest. However, the results of empirical tests of the refined model failed to yield significant results. The present generation of Neoclassical economists however is rarely concerned about a specific investment function.