A simple point about corporate tax reform

September 15, 2017
mm

For the most part, the empirical literature suggests that “cash flow” drives investment more than does say the real interest rate; you can take the latter as one proxy for non-massive changes in rates of return.  So a plan to cut “back taxes” for companies still might stimulate investment, even if it doesn’t appear to alter marginal incentives in the appropriate way.  It will give corporations a higher realized cash flow over the immediately prior period, and again that has had decent predictive power over investment.  But causality?  That is tougher to say, but of course there are theories that self-financed investments are more attractive to managers than having to bring in additional outside monitors.

There is a genuine question whether you should side with the theory or the empirics here, and I am myself agnostic.  Furthermore, perhaps the cash flow of the prior periods proxies for the expected rate of return more accurately than do our available measurements for the expected rate of return.  So you don’t have to take the empirical result as documenting the importance of cash flow.

Still, if you hear someone attacking a tax reform plan as a “corporate giveaway,” just ask them how well they know this literature.  There is at least some chance that “giveaways” boost investment more than do targeted marginal changes.

Article Categories:
General Economics Blogs

Leave a Comment

Your email address will not be published. Required fields are marked *

Close