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

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.