The whole supposed rationale for the big corporate tax cut is that it would supposedly lead to a boom in corporate investment. But Gary Cohn had an awkward moment when he asked CEOs to raise their hands if they would invest more: very few did 1/ cnbc.com/2017/11/15/ceo…
Why not? Actually, there's a lot of evidence that business investment is pretty insensitive to the cost of capital -- interest rates in particular, but presumably cost of equity as affected by taxes too 2/ federalreserve.gov/econresdata/fe…
You might ask, but in that case why does monetary policy matter? The answer is mainly housing, which *is* strongly interest sensitive -- but not what we're talking about here. Also exchange rates and trade balance, but again not the point 3/
And why is business investment insensitive to the cost of capital? Two reasons I would cite. First, equipment depreciates pretty fast, so given its short working life the cost of capital doesn't matter much for profitability of investment 4/
Second, when firms have monopoly power they're reluctant to expand capacity because this would drive down prices. One way to say this is that much of the "cost" of new investment is the indirect effect of reducing returns on existing capital 5/
So reducing taxes doesn't have much effect on the overall true cost of that new investment, and therefore doesn't do much to stimulate investment. The point is that all the evidence -- plus the non-show of hands -- says that the main selling point for tax cuts is very weak 6/
