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American Economic Review: Vol. 98 No. 3 (June 2008)

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Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation

Article Citation

House, Christopher L., and Matthew D. Shapiro. 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation." American Economic Review, 98(3): 737-68.

DOI: 10.1257/aer.98.3.737

Abstract

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.

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Authors

House, Christopher L. (U MI)
Shapiro, Matthew D. (U MI)

JEL Classifications

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


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