Sunday, September 5, 2010


Obama to propose $100 billion permanent extension of research and development tax credit.

Meanwhile, speculation is growing that Austan Goolsbee is the favorite to replace departing CEA chair Christina Romer.

Looks like Goolsbee is the perfect pick to succeed Romer -- his advice is already being ignored even before he's been hired.

From his Investment Tax Incentives, Prices, and the Supply of Capital Goods:
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.

[Down payment on a long analytic post coming along real soon now.]


  1. Hi Josh,

    When I first saw Goolsbee on Daily Show last year, I looked up this piece by him in NY Times on the academic debate on tax cuts
    My overall impression from this piece and the quote you have is that he's an empiricist; his arguments are driven by data. He probably would have justifiying arguments for tax breaks along the lines of different marginal propensities of very-rich, or of r&d activities...etc. It seems like he has a research interest in new technologies, IT stuff, network externalities and such. My sense is that he probably would praise this particular type of tax credit.

  2. Hi Armagan.

    Thanks for the link. I agree with your description of Goolsbee. But for precisely that reason, I have a hard time seeing him praise the R&D tax credit. A statement like, "The evidence that investment is only modestly responsive to price has been one of the most robust findings of the empirical investment literature" does not leave a lot of wiggle room.

    If you read the linked paper, or the several others on his website on the same topic, you'll see his conclusions are consistent and quite strong: Since the supply curve of capital goods is steeply sloping, investment tax credits lead mainly (especially i the short run) to windfalls for capital goods producers rather than increased investment. Since he has quite a bit of intellectual capital invested in this argument (it was his dissertation topic IIRC) I don't see him dropping it, even for his new boss.