Working Paper: NBER ID: w23391
Authors: Christopher L. House; Anamaria Mocanu; Matthew D. Shapiro
Abstract: The distinction between production and purchases of investment goods is essential for quantifying the response to changes in investment tax incentives. If investment goods are tradeable, a large fraction of the demand from changes in tax subsidies will be met from abroad. This difference between production and purchases implies that investment tax incentives will lead to more capital accumulation, but less stimulus to economic activity relative to a no-trade counterfactual. Domestic capacity to produce investment goods is less than perfectly elastic because of quasi-fixed factors of production, adjustment costs, and specialization of labor. This paper builds these features into a DGSE model where key parameters are estimated to match the reduced-form response of investment production and purchases to tax incentives. Typical investment tax policies result in equipment purchases that are split roughly half between domestic and foreign production of equipment.
Keywords: Investment Tax Incentives; Capital Accumulation; Economic Activity
JEL Codes: E22; E62; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment tax incentives (H25) | Purchases of capital equipment (G31) |
| Investment tax incentives (H25) | Domestic production of capital equipment (E22) |
| Investment tax incentives (H25) | Total factor productivity (TFP) (O49) |
| Investment tax incentives (H25) | Structures investment (G31) |