Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation
House, Christopher L., and
Matthew D. Shapiro. 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation."
American Economic Review,
The intertemporal elasticity of investment for long-lived capital goods is
nearly infinite. Consequently, investment prices should fully reflect
temporary tax subsidies, regardless of the investment supply elasticity.
Since prices move one-for-one with the subsidy, elasticities can be
inferred from quantities alone. This paper uses a recent tax policy--bonus
depreciation--to estimate the investment supply elasticity. Investment in
qualified capital increased sharply. The estimated elasticity is
high--between 6 and 14. There is no evidence that market prices reacted to
the subsidy, suggesting that adjustment costs are internal, or that
measurement error masks the price changes.
Article Full-Text Access
Download Data Set
House, Christopher L. (U MI)
Shapiro, Matthew D. (U MI)
G31: Capital Budgeting; Fixed Investment and Inventory Studies
H25: Business Taxes and Subsidies including sales and value-added (VAT)
H32: Fiscal Policies and Behavior of Economic Agents: Firm