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Investment, Accounting, and the Salience of the Corporate Income Tax

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  • Jesse Edgerton
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    Abstract

    This paper develops and tests the hypothesis that accounting rules mitigate the effect of tax policy on firm investment decisions by obscuring the timing of tax payments. I model a firm that maximizes a discounted weighted average of after-tax cash flows and accounting profits. I estimate the weight placed on accounting profits by comparing the effectiveness of tax incentives that do and do not affect them. Investment tax credits, which do affect accounting profits, have larger effects on investment than accelerated depreciation, which does not. This difference in estimated effects is not obviously driven by discounting, cash flow effects, or measurement error. Results thus suggest that accelerated depreciation provisions are less effective than they otherwise would be and that the corporate income tax could create smaller distortions to investment decisions than we would otherwise estimate.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18472.

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    Date of creation: Oct 2012
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    Publication status: Forthcoming: Investment, Accounting, and the Salience of the Corporate Income Tax , Jesse Edgerton. in Trans-Atlantic Public Economics Seminar , Devereux and Gordon. 2014
    Handle: RePEc:nbr:nberwo:18472

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    1. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 2006. "Investment Behavior, Observable Expectations, and Internal Funds," American Economic Review, American Economic Association, vol. 96(3), pages 796-810, June.
    2. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
    3. Mihir A. Desai & Alexander Dyck & Luigi Zingales, 2003. "Theft and Taxes," International Tax Program Papers 0501, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Dec 2004.
    4. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    5. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    6. Jane G. Gravelle, 1994. "The Economic Effects of Taxing Capital Income," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071584, December.
    7. Edgerton, Jesse, 2010. "Investment incentives and corporate tax asymmetries," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 936-952, December.
    8. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
    9. Raj Chetty & Emmanuel Saez, 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 1-31, August.
    10. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
    11. Keating, A. Scott & L. Zimmerman, Jerold, 1999. "Depreciation-policy changes: tax, earnings management, and investment opportunity incentives," Journal of Accounting and Economics, Elsevier, vol. 28(3), pages 359-389, December.
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    Cited by:
    1. Sebastian Eichfelder & Kerstin Schneider, 2014. "Tax Incentives and Business Investment: Evidence from German Bonus Depreciation," CESifo Working Paper Series 4805, CESifo Group Munich.

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