Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 41

Because firms' demands for structures and capital equipment are fairly elastic, it seems clear that tax policy can be effective in spurring demand for such investment. The policy problem in designing such policies is to avoid providing firms with artificial incentives to invest in the wrong thing. Probably the most significant example, of course, is private housing. where favorable tax treatment leads people to buy far larger houses than they would without such a subsidy. However, there are many other examples where tax policy has been designed to favor only certain (politically popular) types of investment. Some examples include tax breaks for historical restorations, for ''green'' investments, and for certain types of farming (even Christmas tree farms). It is unclear whether it is possible to develop tax incentives for investment that avoid such political targeting.