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Taxes and the Quality of Capital

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  • Austan Goolsbee

Abstract

This paper shows that tax policy toward investment, by changing the relative prices of capital varieties, can have a direct effect on the quality of capital goods that firms purchase. The empirical results indicate that this impact is economically important and readily apparent in disaggregated data on farming, mining, and construction machinery. The paper also applies a general method for aggregation using index number theory which suggests that all of the investment increase generated by tax subsidies comes from buying higher quality capital goods as opposed to buying a larger number of capital goods. It shows, further, that the supply of capital is upward sloping with an elasticity of about one. The tax induced quality changes documented in the paper imply a tax distortion whose deadweight loss is neglected in the conventional literature but whose magnitude indicates may represent a substantial efficiency cost from capital taxation (or subsidy).

Suggested Citation

  • Austan Goolsbee, 1998. "Taxes and the Quality of Capital," NBER Working Papers 6731, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6731
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    Cited by:

    1. Ishise, Hirokazu, 2016. "Capital heterogeneity as a source of comparative advantage: Putty-clay technology in a ricardian model," Journal of International Economics, Elsevier, vol. 99(C), pages 223-236.
    2. Hoxha, Indrit & Kalemli-Ozcan, Sebnem & Vollrath, Dietrich, 2013. "How big are the gains from international financial integration?," Journal of Development Economics, Elsevier, vol. 103(C), pages 90-98.
    3. Liu, Liqun, 2011. "The Alchian-Allen theorem and the law of relative demand: The case of multiple quality-differentiable brands," Mathematical Social Sciences, Elsevier, vol. 61(1), pages 52-57, January.
    4. Stephen Bond & Jing Xing, 2010. "Corporate taxation and capital accumulation," Working Papers 1015, Oxford University Centre for Business Taxation.
    5. Jones, John Bailey, 2002. "Has fiscal policy helped stabilize the postwar U.S. economy?," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 709-746, May.
    6. Nadja Dwenger, 2014. "User Cost Elasticity of Capital Revisited," Economica, London School of Economics and Political Science, vol. 81(321), pages 161-186, January.
    7. Wilson, Daniel J., 2009. "IT and Beyond: The Contribution of Heterogeneous Capital to Productivity," Journal of Business & Economic Statistics, American Statistical Association, vol. 27, pages 52-70.
    8. Garret Kent Fellows, "undated". "Capital Input Decisions under Rate of Return Regulation," Working Papers 2014-37, Department of Economics, University of Calgary, revised 06 Nov 2014.
    9. G. Fellows, 2015. "The capital structure of a firm under rate of return regulation: durability and the yield curve," Journal of Regulatory Economics, Springer, vol. 47(3), pages 273-299, June.
    10. Ellen R. McGrattan & James A. Schmitz, 1999. "Maintenance and repair: too big to ignore," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
    11. Walch, Florian & Dwenger, Nadja, 2011. "Tax Losses and Firm Investment: Evidence from Tax Statistics," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48699, Verein für Socialpolitik / German Economic Association.
    12. Joseph E. Aldy & Todd D. Gerarden & Richard L. Sweeney, 2018. "Investment versus Output Subsidies: Implications of Alternative Incentives for Wind Energy," NBER Working Papers 24378, National Bureau of Economic Research, Inc.

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • L64 - Industrial Organization - - Industry Studies: Manufacturing - - - Other Machinery; Business Equipment; Armaments

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