Costs

A second important determinant of the level of investment is the costs of investing. Because investment goods last many years, reckoning the costs of investment is somewhat more complicated than doing so for other commodities like coal or wheat, For durable goods, the cost of capital includes not only the price of the capital good but also the interest rate” that borrowers pay to finance the capital as well as the taxes that firms pay on their incomes.

Additionally, taxes can have a major effect on investment. One important tax is the federal corporation income tax. This tax takes up to of the last dollar of corporate profits, thereby discouraging” investment in the corporate sector. Sometimes, the ” government gives tax breaks to particular activities or sectors, For example, the government encourages home ownership by allowing homeowners to deduct real-estate taxes and mortgage interest from their taxable income.