Nate Silver at 538.com, who it turns out is a U of C trained economist, notes that Mankiw has indulged in some intellectual dishonesty by misrepresenting an economic paper by Roemer & Roemer, Mankiw responds to this criticism here, and Silver responds to the response here.
As I have observed before, the biggest problem with tax cuts as stimulus is that they are pretty damned useless at this point to motivate behavior because the corporate tax rate is fairly low and most major corporations have accumulated pools of paper loses they can carry forward 19 years to offset in profitable years. Combined with certain sorts of stock and debt transfer tricks, major corporations can already avoid most tax liability. Indeed, as the GAO recently reported, 75% of U.S. corporations already pay no taxes in any given year.
Tax cuts as an incentive work by subsidizing behavior, essentially trying to make something not profitable profitable. This is fine in theory. But when a company is already not paying taxes, offering to reduce their tax burden does not impact behavior because it does not impact their bottom line.
So why do companies lobby for them so ardently? A number of reasons. First is that it is always better to have tax breaks than not have tax breaks. But more importantly, there is an old rule in Washington that you cannot beat something with nothing. Let us pretend I am a telecommunications company and I know that the administration will want to make broadband deployment a priority. There are several ways the government might do this. Some of them I like, such as efforts to bribe me. Some I do not like, such as the government providing service itself or requiring me to actually earn subsidy money. So lobbying for corporate tax breaks -- such as the current proposal to give a 60% deduction for laying fiber to high-cost areas -- is much better than doing nothing and having the government give technology opportunity grants to local start-ups. Besides, if I as a company already find it profitable to do some of these projects, the additional tax breaks for stuff I'm already going to do is nice to have.
But for most projects, I use the following analogy. Imagine I need you for some reason to eat a glass of your favorite beverage. While you would be happy to drink the beverage, you have no interest whatsoever in actually eating the glass.
Me: I'll pay you five dollars to eat that glass.
You: How about you leave the five dollars on the table and I will only take it if I eat the glass?
Me: O.K.
Worse, half the time, I come back to discover the $5 gone and the glass empty. When I ask you what happened, you explain that "eat the glass" can actually mean "drink what's in the glass."