TY  - JOUR
AU  - Goolsbee,Austan
TI  - Taxes and the Quality of Capital
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6731
PY  - 1998
Y2  - September 1998
UR  - http://www.nber.org/papers/w6731
L1  - http://www.nber.org/papers/w6731.pdf
N1  - Author contact info:
Austan Goolsbee
Booth School of Business
University of Chicago
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-5869
Fax: 773/702-0458
E-Mail: goolsbee@chicagobooth.edu
AB  - 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).
ER  -