Kevin A. Hassett

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.

Energy conservation investment Do consumers discount the future correctly

We argue that the apparently high discount rates attributed to investors making energy conservation investments are not irrational or the result of some market failure. Rather they may result from an investor recognizing that many conservation investments entail substantial sunk costs. In the presence of these costs and uncertainty over future conservation savings, consumers should use a higher hurdle rate for investment than if there were no uncertainty. Simulations suggest that the hurdle rate should be about four times greater than the standard rate. An implication of our model is that tax subsidies for the purchase of conservation capital are likely to be ineffective. We discuss alternative policy approaches which are more likely to increase energy-efficient investment, namely mandatory efficiency standards and energy taxes.

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.

Tax Policy and Business Investment

In this survey, we review research on tax policy and business investment with four objectives. First, we use a simple prototypical dynamic neoclassical investment model to derive and explain effects of taxation on business investment in the long run and short run. Second, we describe and evaluate empirical tests of neoclassical channels, and we conclude that recent empirical evidence is consistent with neoclassical intuition. Third, we explore qualifications to basic theoretical models and their empirical tests raised by recent research on irreversibility and capital-market imperfections. Finally, we evaluate arguments for and against using tax policy to influence the level or timing of investment.While there is a consensus about the nature and magnitude of tax policy on investment demand considerable uncertainty remains regarding the structure of adjustment costs and the short-run dynamic effects of tax reforms. Consistent with our analysis of equilibrium investment outcomes, ascertaining the effects of tax policy on equilibrium investment requires additional research to examine responsiveness of interest rates, output, and the stock market to tax policy changes.

Energy tax credits and residential conservation investment: Evidence from panel data

Using panel data on individual tax returns and variation in state tax policy, we measure the impact of government tax policies to encourage residential conservation investment on the probability of making these investments. Unlike previous work, we account for unobserved heterogeneity in tastes for energy-saving activities and its possible correlation with tax policy at the state level. We find that controlling for unobserved heterogeneity is very important. Based on our preferred point estimate of the tax price coefficient, a 10 percentage point change in the tax price for energy investment would lead to a 24 percent increase in the probability of making an investment.

Investment under alternative return assumptions Comparing random walks and mean reversion

Many recent theoretical papers have come under attack for modeling prices as Geometric Brownian Motion. This process can diverge over time, implying that firms facing this price process can earn infinite profits. We explore the significance of this attack and contrast investment under Geometric Brownian Motion with investment assuming mean reversion. While analytically more complex, mean reversion in many cases is a more plausible assumption, allowing for supply responses to increasing prices. We show that cumulative investment is generally unaffected by the use of a mean reversion process rather than Geometric Brownian Motion and provide an explanation for this result.

Recent U.S. Investment Behavior and the Tax Reform Act of 1986: A Disaggregate View

The Tax Reform Act of 1986 was expected to cause an overall decline in business fixed investment and a shift in the composition of investment away from machinery and equipment, which previously had received an investment tax credit. Yet neither investment relative to GNP nor equipment investment relative to total investment declined during the period 1987-89. This papers analysis of investment at the level of individual industries and assets helps reconcile the recent pattern of investment and the predicted effects of the Tax Reform Act. We find that the trend toward investment in equipment predated the Act, and that recent investment in equipment has fallen short of what would have been expected on the basis on nontax factors alone. Using a new technique to identify the impact of taxation on investment, we confirm the importance of tax policy using the cross-section pattern of equipment investment since 1986.

Is Newspaper Coverage of Economic Events Politically Biased

AbstractThis paper develops an econometric technique to test for political bias in news reports that controls for the underlying character of the news reported. Because of the changing availability of the number of newspapers in Nexis/Lexis, two sets of time are examined: from January 1991 to May 2004 and from January 1985 to May 2004. Our results suggest that American newspapers tend to give more positive coverage to the same economic news when Democrats are in the White House than when Republicans are; a similar though smaller effect is found for Democratic control of Congress. Our results reject the claim that “reader diversity is a powerful force toward accuracy.” When all types of news are pooled into a single analysis, our results are significant. However, the results vary greatly depending upon which types of economic data are being reported. When newspapers are examined individually the only support that Republicans appear to obtain is from the president’s home state newspapers during his term. This is true for the Houston Chronicle under both Bushes and the Los Angeles Times during the Reagan administration. Contrary to rational expectations, media coverage affects people’s perceptions of the economy.

Marginal Tax Rate Cuts and the Public Tax Debate

In that the had spring the of primary 2001, President objective of Bush reducing proposed marginal a tax bill inthat had e rimary objectiv of re ucing ma ginal income tax rates. In May, a bill that essentially followed the outlines of the Bush proposal became law. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) lowered statutory marginal tax rates for many individual taxpayers, and these reductions were phased in over many years. During the course of the public policy debate concerning the likely economic impact of EGTRRA, very little reference was made to the public finance literature concerning the likely impact of marginal tax rate reductions. Instead, proponents of the bill, like the president himself, argued that the reduction in revenue was advisable because it would lower the

Unionization and Acquisitions

This article explores the question of whether unionization influences the decision of a firm to merge with another firm. The authors combine merger data, taken from COMPUSTAT, with firm-specific union data obtained from several sources. An econometric matching model allows them to isolate the effects of unionization on the probability that the firms studied will be involved in a merger. The authors find that unionization increases the likelihood that a firm will enter the acquisition market and that firms with similar union statuses tend to merge with one another. Copyright 1996 by University of Chicago Press.