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Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation

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  • Christopher L. House
  • Matthew D. Shapiro

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.

Suggested Citation

  • Christopher L. House & Matthew D. Shapiro, 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," American Economic Review, American Economic Association, vol. 98(3), pages 737-768, June.
    • Handle: RePEc:aea:aecrev:v:98:y:2008:i:3:p:737-68
    Note: DOI: 10.1257/aer.98.3.737
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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