Guest Post: Does a lower Corporate Tax burden increase private investment?

Update: Dan here: I am posting Jon’s reply now to comments in this post. Technical troubles continue for Jon.

It is always a pleasure to find clear and concise posts from a ‘new’ econoblogger. Mike Kimel found Econographia. Hopefully more is on the way.

by Jon Hammond

Guest post: Does a lower corporate tax burden increase private investment

The efficacy of taxation in promoting or discouraging economic growth remains a hotbed of disparate perspectives on the part of economists and policymakers alike. Some politicians insist that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth. According to a New York Times/CBS News poll in May 2011, a majority of Americans believe that increased corporate taxes “would discourage American companies from creating jobs.” The assumed mechanism for spurring economic growth and job creation is new private or business investment, incentivized by lowering the corporate tax burden.

The following graph displays a comparison of net private investment as a percent of GDP against corporate tax receipts as a percent of GDP … for the post-war period 1950 – 2008. The data is sourced from the Department of Commerce, Bureau of Economic Analysis (BEA), as follows:

GDP – NIPA table 1.1.5 here
Corporate tax receipts – NIPA table 3.2 here
Net business investment – NIPA table 5.2.5 here

At this level of analysis, we should expect to see an inverse relationship between the two, specifically: with a decline, over time, in corporate tax receipts as a percent of GDP, there should be an increase in net private investment over the same time period.

 Statistically, one would expect these two series to be negatively correlated.

Change in Corporate Taxes and Business Investment, 1950 – 2008:

As the graph shows, both corporate tax receipts and net business investment as a percent of GDP declined over the period 1950 – 2008. The data does not show an inverse relationship between the two series. Rather, the data shows a substantial positive correlation, i.e., high values in the tax series are associated with high values in the private investment series, and the same association is observed for low values. This counters the idea that business investment increases when the tax burden decreases. Moreover, this decline in business investment suggests that by retaining more and more of their earnings, corporations are failing to make economically productive use of their capital .. and shortchanging growth.