Investment tax credit as fiscal stimulus

It looks like we will get some fiscal stimulus, despite my cogent objections (I know, big surprise.)  One part of the stimulus package will probably be an investment tax credit which does have some good properties.  Unlike traditional fiscal policy an investment tax credit cannot be fully crowded out and it works best when it is expected to be temporary. 

Cuts in income taxes and increases in spending must be paid for somehow, so traditional fiscal policy can be crowded out by declines in private spending (My colleague Russ Roberts says fiscal policy is like trying to raise the water level by dipping a bucket in the deep end of a pool and dumping it in the shallow end.)  But an investment tax credit works through a change in incentives – it increases the incentive to invest now, when times are tough, at the expense of less future investment when times are better.

Also, cuts in income taxes stimulate the least when they are expected to be temporary.  But in contrast, an investment tax credit stimulates the most when it is expected to be temporary.  (A temporary credit must be used now or lost while a permanent credit gives you the option to wait).

Thus, a broad-based, temporary investment tax credit has some appeal as fiscal stimulus.   


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