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Investment Tax Incentives, Prices, and the Supply of Capital Goods

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  • Austan Goolsbee

Abstract

Using data on the prices of capital goods, this paper shows that much of the benefit of" investment tax incentives does not go to investing firms but rather to capital suppliers through" higher prices. The reduction in the cost of capital from a 10 percent investment tax credit" increases equipment prices 3.5-7.0 percent. This lasts several years and is largest for assets with" large order backlogs, low import competition, or with a large fraction of buyers able to use" investment subsidies. Capital goods workers' wages rise, too. Instrumental variables estimates" of the short-run supply elasticity are around 1 and can explain the traditionally small estimates of" investment demand elasticities. In absolute value, the demand elasticity implied here exceeds 1."

Suggested Citation

  • Austan Goolsbee, 1997. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," NBER Working Papers 6192, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6192
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    References listed on IDEAS

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    6. Auerbach, Alan J. & Hassett, Kevin, 1992. "Tax policy and business fixed investment in the United States," Journal of Public Economics, Elsevier, vol. 47(2), pages 141-170, March.
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    8. Barry P. Bosworth, 1985. "Taxes and the Investment Recovery," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 1-45.
    9. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
    10. Feldstein, Martin S, 1977. "The Surprising Incidence of a Tax on Pure Rent: A New Answer to an Old Question," Journal of Political Economy, University of Chicago Press, vol. 85(2), pages 349-360, April.
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    12. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
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    Cited by:

    1. Fuest, Clemens & Huber, Bernd, 2000. "Why do governments subsidise investment and not employment?," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 171-192, October.
    2. Austan Goolsbee, 2000. "The Importance of Measurement Error in the Cost of Capital," NBER Working Papers 7558, National Bureau of Economic Research, Inc.
    3. Watson Munyanyi & Campion Chiromba, 2015. "Incentivos fiscales y expansión de las inversiones: la industria del turismo en Zimbabue," REVISTA AD-MINISTER, UNIVERSIDAD EAFIT, issue 27, pages 27-51, November.
    4. Romualdas Ginevičius & Agnė Šimelytė, 2011. "Government incentives directed towards foreign direct investment: a case of central and eastern europe," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 12(3), pages 435-450, May.
    5. Clemens Fuest & Bernd Huber, 1998. "Why Do Countries Subsidize Investment and Not Employment?," NBER Working Papers 6685, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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