A Simple Explanation for the Unfavorable Tax Treatment of Investment Costs
AbstractThe evidence shows that in most countries the present value of depreciation allowances is less than 100% of the cost of capital. In this article we use a real-option model with debt financing, and show that less favorable depreciation allowances are offset by tax benefits arising from debt financing. Allowing partial deduction of capital cost is thus a necessary condition for investment neutrality to hold.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1784.
Date of creation: 2006
Date of revision:
capital structure; irreversibility; real options and taxation;
Find related papers by JEL classification:
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ACC-2006-10-07 (Accounting & Auditing)
- NEP-ALL-2006-10-07 (All new papers)
- NEP-FIN-2006-10-07 (Finance)
- NEP-FMK-2006-10-07 (Financial Markets)
- NEP-PBE-2006-10-07 (Public Economics)
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