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“Tax Incentives, Small Businesses, and Physical Capital Reallocation”��By�Riddha Basu�Doyeon Kim�Manpreet Singh��

Discussant: Erik Gilje

The Wharton School, University of Pennsylvania

and NBER

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Research Questions

How is physical capital both created and redeployed in the economy?

Investigates a policy which increases the NPV of new physical capital

What do firms invest in? Is there heterogeneity across firms?
What happens to old physical capital?
What happens to business entry?

Relates to an important literature on the redeployability of physical capital (Maksimovic and Phillips (2001))

New Physical Capital

Old Physical Capital

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Three Major Comments

Better Context for Economic Magnitudes

Assessment of the plausibility of magnitudes

Empirical Internal Validity: Re-orient use of final bonus depreciation regime (TCJA)

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Empirical Design

Paper will compare firms that benefit more from this acceleration vs firms than benefit less
3 Different bonus depreciation regimes, last regime is different, applies to both new and used equipment

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1) Better Context for Economic Magnitudes

I came away from the paper not really having context for what the magnitudes mean

Finding 1: Treated industries increase new equipment purchases 5.3%

How does this compare to the factors that drive equipment transfers (firm age) identified in Ma, Murfin, and Pratt (forthcoming)?
How does this effect compare to other factors that might matter, such as local credit supply?
Should bonus depreciation be considered first order relative to these other factors?
Is new equipment purchase replacing old equipment or is this investment that otherwise wouldn’t have occurred?

Finding 2: Old equipment falls in price after bonus depreciation by 2.4%

How does this compare to factors that others have identified?
How does this compare to bankruptcy fire sale effects?

Finding 3: Increase of new businesses of 2.3%

Is this big or small compared to changes in

Banking deregulation
Local deposit supply/credit constraints

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2) Are the Magnitudes Plausible?

Finding 3: Increase of new businesses of 2.3%

Table 3: Average equipment value is $87,718

After bonus depreciation is passed, equipment value falls by 2.4% or $2,105

This strikes me as less of an effect than sales tax differences across states

Is this change in value material enough for someone to decide to start a business

Sales for the average business are $43 million (median $604,000)

It is surprising that such a small change in cost, in one part of the production input function would warrant new business entry

Robb and Robinson (2014) show that total financial capital of new businesses averages $117K

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3) TCJA

Both New and Used equipment get bonus treatment in the TCJA

I would encourage the paper to use this event as a falsification event, or at least a distinct event

Is the new business effect 0 after this event?

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Conclusions

Overall this speaks to a very under studied research questions

Very interesting granular data, lots to explore.

Paper has a nice opportunity to make a contribution

I would urge the authors to think more about characterizing the movement of assets across firms and the broader economic context that they can explore