Taxes and the Quality of Capital

Austan Goolsbee ()

No 6731, NBER Working Papers from National Bureau of Economic Research, Inc

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).

JEL-codes: E62 L64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-pbe and nep-pub
Date: 1998-09
Note: PE
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Journal Article: Taxes and the quality of capital (2004)
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