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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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    Cited by:

    1. Austan Goolsbee, 2000. "The Importance of Measurement Error in the Cost of Capital," NBER Working Papers 7558, National Bureau of Economic Research, Inc.
    2. 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.
    3. 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.
    4. Lokshin, Boris & Mohnen, Pierre, 2013. "Do R&D tax incentives lead to higher wages for R&D workers? Evidence from The Netherlands," Research Policy, Elsevier, vol. 42(3), pages 823-830.
    5. Xuexian Gao & Haidong Zheng & Yan Zhang & Naser Golsanami, 2019. "Tax Policy, Environmental Concern and Level of Emission Reduction," Sustainability, MDPI, vol. 11(4), pages 1-17, February.
    6. Desiderio Romero Jordán & José Félix Sanz Sanz, 2007. "Eficacia de los incentivos fiscales a la inversión en I+D en España en los años noventa," Hacienda Pública Española / Review of Public Economics, IEF, vol. 183(4), pages 9-32, december.
    7. Clemens Fuest & Bernd Huber, 1998. "Why Do Countries Subsidize Investment and Not Employment?," NBER Working Papers 6685, National Bureau of Economic Research, Inc.
    8. 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.
    9. Miroslav Plojhar & Martin Srholec, 2004. "Politická ekonomie investičních pobídek [Political economics of investment incentives]," Politická ekonomie, Prague University of Economics and Business, vol. 2004(4), pages 449-464.
    10. Lokshin, Boris & Mohnen, Pierre, 2008. "Wage effects of R&D tax incentives:Evidence from the Netherlands," MERIT Working Papers 2008-034, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    11. Oo, Aung & Muntasir, Nafis & Poon, Kenneth & Weersink, Alfons & Thimmanagari, Mahendra, 2016. "Development of an Agricultural Biomaterial Industry in Ontario," Working Papers 241708, University of Guelph, Institute for the Advanced Study of Food and Agricultural Policy.

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    JEL classification:

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

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