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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page 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.

Keywords: Investment tax incentives, equipment investment

Full paper (222 KB PDF) | Full paper (483 KB Postscript)

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Last update: May 18, 1999