Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-11-20T09:28:54.491Z Has data issue: false hasContentIssue false
  • English
  • Français

A NOTE ON THE BUSH TAX CUTS: DID THEY SUCCEED IN STIMULATING BUSINESS INVESTMENT?

Published online by Cambridge University Press:  07 March 2016

Ky-hyang Yuhn  and
Christopher S. Bennett
Ky-hyang Yuhn*
Affiliation:
Florida Atlantic University
Christopher S. Bennett
Affiliation:
Florida Atlantic University
*
Address correspondence to: Ky-hyang Yuhn, Department of Economics, College of Business, Florida Atlantic University, Boca Raton, FL 33431, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Traditional regression models have reported conflicting results on the effectiveness of tax incentives in stimulating business investment. This study investigates the effects of the Bush tax cuts on U.S. investment using intervention analysis in conjunction with regression analysis that controls for relevant variables. Although intervention analysis has the advantage of allowing the behavior of investment to be influenced only by the time path of exogenous shocks such as tax reforms, control variables can test for the robustness of the results. We have found that the two tax reforms enacted in 2001 and 2003 had little impact on marginal investment incentives. The intervention analysis results are further reinforced by the evidence provided by alternative regression models that control for a host of variables. The failure of the tax reforms to stimulate investment spending may be attributable to several factors, such as a global savings glut, cheap global money, inappropriate designs for tax incentives, and budget deficits.

Keywords

Marginal Tax RatesARIMAIntervention AnalysisCapital Overhang
Type
Notes
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1623 - 1639
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Agell, J., Lindh, T., and Ohlsson, H. (1997) Growth and the public sector: A critical review essay. European Journal of Political Economy 13, 33–52.Google Scholar
Arbex, M. (2013) A quantitative analysis of tax enforcement and optimal monetary policy. Macroeconomic Dynamics 17, 1096–1117.CrossRefGoogle Scholar
Atkinson, A.B. (1995) The welfare state and economic performance. National Tax Journal 48, 171–198.Google Scholar
Auerbach, A.J. (1987) The tax reform act of 1986 and the cost of capital. Journal of Economic Perspectives 1, 73–86.Google Scholar
Auerbach, A.J. and Hassett, K. (1992) Tax policy and business fixed investment in the United States. Journal of Public Economics 47, 141–170.CrossRefGoogle Scholar
Bizer, D.S. and Judd, K.L. (1989) Taxation and uncertainty. American Economic Review 79, 331–336.Google Scholar
Boskin, M.J. (1988) Tax policy and economic growth: Lessons from the 1980s. Journal of Economic Perspectives 2, 71–97.CrossRefGoogle Scholar
Brimmer, A.F. and Sinai, A. (1976) The effects of tax policy on capital formation, corporate liquidity and the availability of investible funds: A simulation study. Journal of Finance 31, 287–308.Google Scholar
Carroll, R., Hasset, K.A., and Mackie, J.B. III (2003) The effect of dividend tax relief on investment incentives. National Tax Journal 56, 629–651.Google Scholar
Castles, F.G. and Dowrick, S. (1990) The impact of government spending levels on midterm economic growth in the OECD, 1960–85. Journal of Theoretical Politics 2, 173–203.Google Scholar
Chirinko, R.S. and Eisner, R. (1983) Tax policy and investment in major U.S. macroeconomic models. Journal of Public Economics 20, 139–166.Google Scholar
Corker, R., Evans, O., and Kenward, L. (1989) Tax policy and business investment in the United States: Evidence from the 1980s. IMF Staff Papers 36, 31–62.Google Scholar
Desai, M.A. and Goolsbee, A.D. (2004) Investment, overhang, and tax policy. Brookings Papers on Economic Activity 2, 285–338.Google Scholar
Eisner, R. (1978) Factors in Business Investment. Cambridge, MA: Ballinger.Google Scholar
Eisner, R. and Lawler, P.J. (1975) Tax policy and investment: An analysis of survey responses. American Economic Review 65, 206–212.Google Scholar
Eisner, R. and Nadiri, M.I. (1968) Investment behavior and neoclassical theory. Review of Economics and Statistics 50, 369–382.CrossRefGoogle Scholar
Enders, W. (2004) Applied Econometric Time Series, 2nd ed. Hoboken, NJ: Wiley.Google Scholar
Engen, E.M. and Skimmer, J. (1992) Fiscal Policy and Economic Growth. NBER working paper 4223.Google Scholar
Feldstein, M.F. (1982) Inflation, tax rules and investment: Some econometric evidence. Econometrica 50, 825–862.CrossRefGoogle Scholar
Gale, W.G. (2010) Five myths about the Bush tax cuts. Available at http://www.washingtonpost.com/wp-dyn/content/article/2010/07/30AR2010073002671_pf.html.Google Scholar
Gale, W.G. and Potter, S.R. (2002).The Bush tax cut: One year later. Available at http://www.brookings.edu/papers/2002/06useconomics_gale.aspx?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BrookingsRSS%2Fseries%2Fbrookingspolicybrief+%28Brookings%3A+Series+-+Brookings+Policy+Brief+Series%29&utm_content=Google+Feedfetcher.Google Scholar
Guo, J.T. and Krause, A. (2014) Optimal dynamic nonlinear income taxation under loose commitment. Macroeconomic Dynamics 18, 1403–1427.Google Scholar
Hall, R.E. and Jorgenson, D.W. (1967) Tax policy and investment behavior. American Economic Review 57, 391–414.Google Scholar
Hassett, K.A. and Leahy, J.V. (2004) Investment, overhang, and tax policy: Comments and discussion. Brookings Papers on Economic Activity 2, 339–355.Google Scholar
Hasset, K.A. and Metcalf, G.E. (1999) Investment with uncertain tax policy: Does random tax policy discourage investment? Economic Journal 109, 372–393 Google Scholar
Hederman, R.S. (2004) Tax cuts boost business investment. Available at http://www.heritage.org/Research/Taxes/wm412.cfm?renderforprint=1.Google Scholar
Hulten, C.R. (1984) Tax policy and the investment decision. American Economic Review 74, 236–241.Google Scholar
Jorgenson, D.W. (1963) Capital theory and investment behavior. American Economic Review 53, 247–259.Google Scholar
Jorgenson, D.W. (1971) Econometric studies of investment behavior: A survey. Journal of Economic Literature 9, 1111–1147.Google Scholar
Levine, R. and Renelt, D. (1992) A sensitive analysis of cross-country regressions. American Economic Review 82, 942–963.Google Scholar
Riedl, B.M. (2007) Ten Myths about the Bush Tax Cuts. No. 2001. Backgrounder: The Heritage Foundation.Google Scholar
Romer, C.D. and Romer, D. (2010) The macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks. American Economic Review 100, 763–801.Google Scholar
Sandmo, A. (1974) Investment incentives and the corporate income tax. Journal of Political Economy 82, 287–302.Google Scholar
Santoro, M. and Wei, C. (2012) A note on the impact of progressive dividend taxation on investment decisions. MacroeconomicDynamics 16, 309–319.Google Scholar
Sinai, A. (1979) Tax Expenditures and Business Capital. Testimony presented at hearings on tax expenditures, Committee on Ways and Means, 96th Congress, pp. 35–38.Google Scholar
Sinai, A. and Eckstein, O. (1983) Tax policy and business fixed investment, revisited. Journal of Economic Behavior and Organization 4, 131–162.Google Scholar
Summers, L.H. (1981) Taxation and corporate investment: A q-theory approach. Brookings Papers on Economic Activity 1, 67–140.Google Scholar
Widmalm, F. (2001) Tax structure and growth: Are some taxes better than others? Public Choice 107, 199–219.CrossRefGoogle Scholar