President Obama is holding a press conference today, and according to the Washington Post, his purpose is twofold: The press conference is first to introduce his pick to replace Christina Romer as chair of the Council of Economic Advisors, Austan Goolsbee, and second to “[fault] Republicans for refusing to help him turn around the sluggish economy or support some proposed new tax breaks for businesses that the GOP has backed in the past.”
Looks like Goolsbee is the perfect pick to succeed Romer — his advice is already being ignored even before he’s been hired.
Although there appears to be an abiding faith among policy makers that tax incentives can influence the investment decisions of firms and serve as a tool for stabilizing the economy, empirical evidence for the connection is weak. Econometric research has commonly found that tax policy and the cost of capital have little effect on real investment. Economic theory predicts that the marginal user cost of capital should be the primary determinant of investment demand but actual estimates of the price elasticity of nvestment … mostly lie between zero and -0.4… The evidence that investment is only modestly responsive to price has been one of the most robust findings of the empirical investment literature…
In addition to their large revenue costs, investment tax subsidies may give large, unintended rents to capital suppliers without increasing real investment until several years later because of the short-run asset price responses of capital goods. For policy makers interested in using tax policy to stimulate investment or, especially, to smooth business cycle fluctuations, the results are not promising.
“. . . the results are not promising.” I hope the reporters at today’s press conference are aware that Goolsbee’s academic work supports the position of most Republicans on this issue, which is that the benefits of these tax breaks are being oversold. Republicans would probably go further than Goolsbee and note, as the editors did on Wednesday, that the tax breaks are being offered in exchange for a worse overall tax climate:
Increasing tax rates on income, dividends, and capital gains, even if those hikes were confined to the top two brackets, would weaken incentives for some of the country’s most productive individuals and profitable small businesses to work, invest, hire, and grow. A slightly bigger write-off for R&D isn’t sufficient to cushion that blow, and business owners know it.
Yes they do. But does anyone in the White House press corps? Let’s hope so.