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Investment incentives and corporate tax asymmetries

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  • Edgerton, Jesse
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    Abstract

    Recent facts on the importance of corporate losses motivate more careful study of the impact of tax incentives for investment on firms that lose money. I model firm investment decisions in a setting featuring financing constraints and carrybacks and carryforwards of operating losses. I estimate investment responses to tax incentives allowing effects to vary with cash flows and taxable status. Results suggest that asymmetries in the corporate tax code could have made recent bonus depreciation tax incentives at most 4% less effective than they would have been if all firms were fully taxable. Cash flows have more important effects on the impact of tax incentives. Recent declines in cash flows would predict a 24% decrease in the effectiveness of bonus depreciation. Results thus suggest that tax incentives have the smallest impact on investment exactly when they are most likely to be put in place -- during downturns in economic activity when cash flows are low.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Public Economics.

    Volume (Year): 94 (2010)
    Issue (Month): 11-12 (December)
    Pages: 936-952

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    Handle: RePEc:eee:pubeco:v:94:y:2010:i:11-12:p:936-952

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    Web page: http://www.elsevier.com/locate/inca/505578

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    Keywords: Taxes Investment Bonus depreciation Tax asymmetries Cash flows;

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    Cited by:
    1. Kroft, Kory & Notowidigdo, Matthew J., 2012. "Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence," CLSSRN working papers, Vancouver School of Economics clsrn_admin-2012-26, Vancouver School of Economics, revised 29 Oct 2012.
    2. Langenmayr, Dominika & Lester, Rebecca, 2014. "Taxation and Corporate Risk-Taking," Discussion Papers in Economics 20977, University of Munich, Department of Economics.
    3. Haufler, Andreas & Mardan, Mohammed, 2013. "Cross-border loss offset can fuel tax competition," Discussion Papers in Economics 14362, University of Munich, Department of Economics.
    4. Daniel Dreßler & Michael Overesch, 2013. "Investment impact of tax loss treatment—empirical insights from a panel of multinationals," International Tax and Public Finance, Springer, Springer, vol. 20(3), pages 513-543, June.
    5. Haufler, Andreas & Norbäck, Pehr-Johan & Persson, Lars, 2012. "Entrepreneurial Innovations and Taxation," Working Paper Series, Research Institute of Industrial Economics 896, Research Institute of Industrial Economics.
    6. Dario Simon Judzik & Hector Sala Lorda, 2014. "The determinants of capital intensity in Japan and the U.S," Working Papers wpdea1404, Department of Applied Economics at Universitat Autonoma of Barcelona.
    7. Jesse Edgerton, 2012. "Investment, Accounting, and the Salience of the Corporate Income Tax," NBER Working Papers 18472, National Bureau of Economic Research, Inc.
    8. Estelle P. Dauchy & Sebastien Bradley & Makoto Hasegawa, 2014. "Investor Valuations of Japan's Adoption of a Territorial Tax Regime: Quantifying the Direct and Competitive Effects of International Tax Reform," Working Papers w0201, Center for Economic and Financial Research (CEFIR).
    9. Jesse Edgerton, 2012. "Investment, accounting, and the salience of the corporate income tax," Working Papers, Oxford University Centre for Business Taxation 1230, Oxford University Centre for Business Taxation.
    10. Zhiyong An, 2012. "Taxation and foreign direct investment (FDI): empirical evidence from a quasi-experiment in China," International Tax and Public Finance, Springer, Springer, vol. 19(5), pages 660-676, October.
    11. Fahr, René & Janssen, Elmar & Sureth, Caren, 2014. "Can tax rate increases foster investment under entry and exit flexibility? Insights from an economic experiment," arqus Discussion Papers in Quantitative Tax Research 166, arqus - Arbeitskreis Quantitative Steuerlehre.
    12. Dreßler, Daniel, 2012. "The impact of corporate taxes on investment: An explanatory empirical analysis for interested practitioners," ZEW Discussion Papers 12-040, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    13. Walch, Florian & Dwenger, Nadja, 2011. "Tax Losses and Firm Investment: Evidence from Tax Statistics," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48699, Verein für Socialpolitik / German Economic Association.

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