What Can Goolsbee’s Early Academic Work Tell Us About the R&D Tax Credit?

JW Mason has a great find and post about the R&D tax credit that made me laugh:

Goolsbeeism

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.

Heh.

Austan Goolsbee’s dissertation and early influential work is actually on investment tax credits. The answer: most of investment credit, when aggregated, doesn’t lead to actual new investment but instead is paid off in rents. Investment goods are inelastic in the short term so most of the money is paid off to patent holders, increased wages, etc. As Mason points out in comments: “Since the supply curve of capital goods is steeply sloping, investment tax credits lead mainly (especially in the short run) to windfalls for capital goods producers rather than increased investment.”

So Goolsbee spent most of his early academic career proving, using detailed statistics and carefully cultivated data, that using R&D style tax policy to smooth business cycles and stimulate investment is a really bad idea. (Again, Goolsbee: ” For policy makers interested in using tax policy to stimulate investment or, especially, to smooth business cycle fluctuations, the results are not promising.”) Let’s watch him defend it in the public sphere because the term “stimulus” has become toxic amid high unemployment and because this is all that can get through the broken Senate. Poor academic.

All things considered if this is all that can move I suppose I should support it. But it’s terrible bang-for-the-buck style stimulus if it is even that, and supporting rent structures inside R&D pipelines is hardly the investment that energy-retrofitting homes or building rail would be for the 21st century economy.

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13 Responses to What Can Goolsbee’s Early Academic Work Tell Us About the R&D Tax Credit?

  1. Arpit Gupta says:

    And let’s not forget his work (say here: http://faculty.chicagogsb.edu/austan.goolsbee/research/laf.pdf or http://faculty.chicagogsb.edu/austan.goolsbee/research/taxrich.pdf ) suggesting that tax hikes on the rich don’t result in much deadweight loss.

    Golsbee’s already lost the auto bailout argument. If he ends up as CEA chair, and keeps the Bush cuts for the richest as well as the business credits, that will be amusing. He doesn’t seem to be winning any arguments.

  2. Soprano says:

    “All things considered if this is all that can move I suppose I should support it.”

    Why should you support “terrible bang-for-the-buck style stimulus if it is even that”?

  3. I would like to know what goes on in those meetings. I am sure there are people at 1600 that know how to use Teh Google. And Goolsbee doesn’t remember his old research? This is just further proof that all you can do is laugh when ever GOP’ers or business people say Obama is anti-business.

  4. Tracy Lightcap says:

    You people seem to think this proposal was intended to actually pass.

    I think it was obviously conceived–and pretty cleverly too–to be a political hammer to hit the Pubs with until November. After all, they can either oppose it and look like tightwads who really are the party of No or they can go along with it and give the Pres a political victory involving tax cuts right before the election.

    Now, my guess is they will oppose it since they could pass that off as a step against the deficit and if they back off of their “Obama is death to the economy because of all the spending” meme they will lose votes among the committed. My guess is also that the Obama folks think exactly the same thing: no sweat on actually having to sign the thing, after all some Dems in the Senate will probably oppose it. And if they end up having to, well, a windfall to capital goods producers might be bad long term, but it’s more aggregate demand short term. Inefficient, but, hey, why not?

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  6. ep3 says:

    What Obama is doing is continuing to add to the surplus cash reserves that companies (large fortune 500 ones) are holding. This is to buffer them when and if another economic shock occurs. Some would argue this is a good idea. Companies can dip into this instead of further layoffs. But this is not what happens. During the “expansion” of the first part of the decade, companies were laying off workers during growth. So in another downturn, they will either lay more off to maintain that cash or use the funds to buy up and shut down competitors.
    This is nothing more than another back door taxpayer bailout of corporations. Most mom and pop “grocery stores” won’t be able to utilize this type of credit. In this downturn, they are doing everything to scrape by. The only way they “invest in R&D” is when their store is flooded with customers. And they probably have suffered book tax losses for several years (see the article on the decline of retail) and additional write-off does not help them.
    What we have is a drug making company who constantly uses R&D getting to write most of that off at the expense of the treasury. They get to pass that along to shareholders.

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  10. ep3 has an important point — in part because R&D tax credits are mostly for the largest corporations. They have the staff to document and keep track of them. Even though the Small Business Administration is speaking in favor of making the cut permanent, Mom and Pop are not the main beneficiary. Small business gets a very small cut and struggles to even for that. (A piece on that for those interested: http://www.businessweek.com/magazine/content/09_70/s0910020428447.htm)

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