Finance and Economics Discussion Series (FEDS)
May 1999
Tax Incentives, Material Inputs, and the Supply Curve for Capital Equipment
Karl Whelan
Abstract:
The slope of the supply curve for capital equipment has important implications for the macroeconomics of investment and the effects of tax reform on capital accumulation. Goolsbee (1998) has used changes in investment tax incentives to identify whether this supply curve is significantly upward-sloping and has concluded that it is. This paper shows that investment tax incentives are a poor instrument for identifying this supply curve because they are spuriously correlated with supply shocks for equipment producers. Once input costs for equipment producers are controlled for, there is no evidence of a relationship between tax incentives and equipment prices. In fact, the evidence favors the interpretation that the supply curve is flat.
Full paper (483 KB Postscript)Keywords: Investment tax incentives, equipment investment
PDF: Full Paper
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