Eric Ohrn, Grinnell College

During the years 2018--2028, the US federal government will spend $285 billion on accelerated depreciation policies that subsidize capital investment.  Advocates of these policies argue the incentives increase capital intensivity and productivity, resulting in higher wages for workers.  Opponents raise concerns that the policies decrease the relative cost of capital, leading to inefficiently high levels of automation that eliminate jobs and decrease wages, especially for low-wage and less educated workers.  These concerns are particularly troubling given the recent rise in income inequality in the US.  
 
In this paper, we use administrative data from the US Census Bureau and an event study difference-in-differences framework to document the effects of accelerated policies on worker outcomes in the US manufacturing sector.  In accord with previous research, we find accelerated depreciation substantially increases capital investment.  The increased investment is matched with higher levels of employment, but also decreases in average wages.  The tax policies do not raise productivity or alter capital-labor ratios. These findings are hard to reconcile with canonical models describing the interaction between capital and labor and force us to reconsider the design of tax policies to benefit workers in the modern economy.