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