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The Role of Tax Depreciation for Investment Decisions: A Comparison of European Transition Countries

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  • Chang Woon Nam

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  • Doina Maria Radulescu

Abstract

This study compares incentive effects of various tax depreciation methods currently adopted in European transition economies. In these countries straight-line, geometric-degressive and accelerated depreciation measures are quite popular in combination with different corporate tax rates. Their generosity is determined on the basis of Samuelson’s true economic depreciation. For this purpose, the present value model is applied under the particular consideration of different financial structures. In this context the traditional Modigliani-Miller theorem for capital structure is revisited. Furthermore, the aspect of inflation is integrated into the model. The central issue is that the historical cost accounting method generally applied for the calculation of the corporate tax base causes fictitious profits in inflationary phases that are also taxed. Therefore, in an inflationary period generous tax depreciation provisions do not promote private investment as designed, but partly compensate such additional tax burdens caused by inflation.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 847.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_847

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Related research

Keywords: true economic depreciation; tax depreciation rules; corporate tax; investment decision; financial structure; net present value model; inflation; transition economies;

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  1. Sandmo, Agnar, 1974. "Investment Incentives and the Corporate Income Tax," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 287-302, Part I, M.
  2. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1, May.
  4. Hans-Werner Sinn & Willi Leibfritz & Alfons J. Weichenrieder, 1999. "ifo Vorschlag zur Steuerreform," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 52(18), pages 03-18, October.
  5. Kopcke, Richard W, 1981. "Inflation, Corporate Income Taxation, and the Demand for Capital Assets," Journal of Political Economy, University of Chicago Press, vol. 89(1), pages 122-31, February.
  6. Kay, J A, 1977. "Inflation Accounting-A Review Article," Economic Journal, Royal Economic Society, vol. 87(346), pages 300-11, June.
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Cited by:
  1. Chang Woon Nam & Doina Maria Radulescu, 2004. "Does Debt Maturity Matter for Investment Decisions?," CESifo Working Paper Series 1124, CESifo Group Munich.
  2. Chang Woon Nam & Doina Maria Radulescu, 2004. "Types of Tax Concessions for Attracting Foreign Direct Investment in Free Economic Zones," CESifo Working Paper Series 1175, CESifo Group Munich.
  3. Chang Nam & Doina Radulescu, 2004. "Do Corporate Tax Concessions Really Matter for the Success of Free Economic Zones?," Economic Change and Restructuring, Springer, vol. 37(2), pages 99-123, 06.
  4. Chang Nam & Doina Radulescu, 2007. "Effects of Corporate Tax Reforms on SMEs’ Investment Decisions under the Particular Consideration of Inflation," Small Business Economics, Springer, vol. 29(1), pages 101-118, June.

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