Friday, September 10, 2010

Uh Oh: Kevin Hassett Likes Obama's Business Tax Credit Proposal

How do I know Obama's proposed business investment tax credit won't do much to stimulate the economy? Kevin "DOW 36,000" Hassett thinks it's a great idea.

Indeed, Hassett makes quite the case for this latest round of giveaways to Corporate America growth-oriented tax policy:
Because the benefit of expensing depends on the time value of money and interest rates are currently quite low, one might think that expensing would have a small effect now. Nevertheless, all but the most prominent firms have to pay interest rates that are much higher than Treasury rates today when they borrow.
Actually, Hassett had it right the first time. This latest measure won't do much. Just ask incoming CEA chair Austan Goolsbee, whose academic work included looking at such tax credits:
Econometric research has commonly found that tax policy and the cost of capital have little effect on real investment. [...] For policy makers interested in using tax policy to stimulate investment or, especially, to smooth business cycle fluctuations, the results are not promising.
Which makes you wonder, who exactly is telling Obama this is good economic policy? Or (more likely) is this just a ploy to appear less "anti-business" with midterm season in full swing?

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