ABSTRACT

Tax Incentives, Supply Shocks and Equipment Prices (June 2000).

An important question concerning the efficiency of investment tax incentives in promoting capital accumulation is whether they raise capital equipment prices because of an upward-sloping equipment supply curve. Goolsbee (1998) presents evidence of a positive relationship between tax incentives and equipment prices as evidence of a significantly upward-sloping supply curve for equipment. This paper shows that investment tax incentives are a poor instrument for identifying this supply curve because they are 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 a flat supply curve.