Jason G. Cummins

A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments

We thank Alan Auerbach, Ricardo Caballero, Bill Gentry, Bronwyn Hall, Robert Hall, Charles Himmelberg, Anil Kashyap, Steve Oliner, Kristen Willard, and seminar participants at the Brookings Panel on Economic Activity, Board of Governors of the Federal Reserve System, University of Chicago, Columbia University, Duke University, Federal Reserve Bank of New York, University of Kentucky, University of Maryland, Miami University, Massachusetts Institute of Technology, National Bureau of Economic Research, Princeton University, and C.V. Starr Center Conference on Finance, Productivity, and Real Activity for helpful comments. Cummins thanks the Board of Governors of the Federal Reserve System for their hospitality during an internship. Hubbard is grateful for support from the John M. Olin Foundation to the Center for the Study of the Economy and State at the University of Chicago and from the Federal Reserve Bank of New York. The views expressed in this paper are those of the authors and do not reflect those of the Board of Governors of the Federal Reserve System.

Tax reforms and investment: A cross-country comparison

We use firm-level panel data to explore the extent to which fixed investment responds to tax reforms in 14 OECD countries. Previous studies have often found that investment does not respond to changes in the marginal cost of investment. We identify some of the factors responsible for this finding and employ an estimation procedure that sidesteps the most important of them. In so doing, we find evidence of statistically and economically significant investment responses to tax changes in 12 of the 14 countries.

A Retrospective Evaluation of the Effects of Temporary Partial Expensing

This paper examines how business investment responded to temporary partial expensing, first enacted in 2002 and expanded in 2003. In principle, partial expensing boosted the incentive to invest which should have had a discernable impact on spending. However, the tax changes did not occur in a vacuum, so it is challenging to isolate their impact. Our empirical approach exploits a feature of the tax change which, under certain assumptions, allows us to cleanly estimate its impact. Specifically, partial expensing provided relatively generous tax treatment for long-lived assets. We use this insight in order to construct a difference-in-difference estimator of the tax effects. In addition, the standard model of investment with capital adjustment costs predicts a run up in investment spending prior to expiration and a pothole just after. Our examination of the details of expenditure patterns before, during, and after partial expensing using both monthly and quarterly data suggests considerable ambiguity as to whether the models predictions were borne out. In addition, anecdotal evidence provides only limited support for the effectiveness of temporary partial expensing.

Optimal Investment by Financially Xenophobic Managers

Case studies show that corporate managers seek financial independence to avoid interference by outside financiers. We incorporate this financial xenophobia as a fixed cost in a simple dynamic model of financing and investment. To avoid refinancing in the future, the firm alters its behavior depending on the extent of its financial xenophobia and the realization of a revenue shock. With a sufficiently adverse shock, the firm holds no liquidity. Otherwise, the firm precautionarily saves and holds both liquidity and external finance. Investment always responds to neoclassical fundamentals, but responds to cash flow only when the firm holds no liquidity.