Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation
Christopher L. House, Matthew D. Shapiro
American Economic Review · 2008 · Volume 98 · Issue 3
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.
Keywords
Capital Budgeting, Fixed Investment and Inventory Studies, Business Taxes and Subsidies including sales and value-added (VAT), Fiscal Policies and Behavior of Economic Agents: Firm
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