,
17 tweets,
5 min read
Read on Twitter
In new research, Daniel G. Garrett, @jcsuarez, and I provide the first in-depth look at how “accelerated depreciation” incentives affect workers. nber.org/papers/w25546 
The US is spending about $25 billion dollars per year allowing businesses to immediately deduct the cost of new investments from their tax bill. This provision, part of the TCJA, reduces the present value cost of new investments and was sold on the premise of helping workers.
In our paper, we look at the effect of a similar policy called “bonus depreciation” over the years 2002—2012. Previous research from Eric Zwick and James Mahon has shown these policies have a big effect on investment but the jury is still out on their labor market effects.
To perform the analysis, we first rely on measures based on tax return data from Zwick and Mahon (2017) (aeaweb.org/articles?id=10…) to determine which industries benefit the most from bonus depreciation.
We then use data from the Census to measure the percentage of employees in each county in the US that work in the industries that benefit the most from the policy.
By comparing counties that benefit a lot from bonus depreciation to the counties that benefit less as the policy is implemented we can trace out the effects of the policy across several outcomes.
We find a pretty substantial increase in employment; moving from the 25th to the 75th percentile of the bonus depreciation benefit distribution increases employment by about 2%. However, almost all of this increase happens in just a few years. The effect then stabilizes.
While this seems like a big effect, as we dug deeper, we found several reasons to think bonus depreciation and accelerated depreciation policies probably aren’t the best way to help workers.
First, when you compare the increase in employment relative to the policy’s price tag, it turns out to be a costly way to create jobs. We calculate a cost-per-job of about $58,000.
This is substantially higher than the cost-per-job of tax cuts for low income workers which generate one job per $30,000 (check out @omzidar’s forthcoming JPE article to see this result nber.org/papers/w21035).
Second, we find no effect on wages in the first few years of bonus depreciation and then decreases in wages during the later part of our sample period.
Third, we find that in the longer-term this policy may be prompting firms to substitute capital for labor. To draw this conclusion, we show that the policy creates much more substantial and sustained growth in capital investment relative to employment.
Then, we use our unique setting to estimate the elasticity of substitution between capital and labor and look at how it changes over time.
We show that in the early part of our sample capital and labor act as perfect complements, but as the policy is in place for several years the elasticity of substitution grows and can be greater than 1.
This means that in the short run, firms buy machines that work alongside labor but in the longer-run firms are shifting toward more capital intensive technologies.
These results suggest that accelerated depreciation policies – which ostensibly are designed to help workers – may actually be incentivizing firms to automate, shifting work from humans to machinery.
BTW, I screwed up Juan Carlos's handle up top. The right handle is @J_C_Suarez.
