Did the Corporate Income Tax Rate Reductions Affect Business Investment?
Business investment in plant and equipment edged down relative to gross domestic product (GDP) in 2000 and continued to decline until 2002, despite the corporate income tax rate reductions. Investment turned around subsequently and by 2006 substantially exceeded the level attained before the program of tax reductions began (Chart 1). One way of interpreting these developments is that the tax reductions succeeded in increasing investment. Investment was much higher as a per cent of GDP in 2006, with lower tax rates, than in 2000, with higher ones. An alternative view is that the tax reductions were ineffective since they coincided with a period of investment decline. Despite the tax reductions, investment stayed below its 2000 level in 2001, 2002 and 2003 and barely surpassed it in 2004. The pickup in investment in 2005 and 2006 could have been a delayed reaction to the tax reductions but could equally have been the result of other factors. It is therefore clear that the important quest
