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Investment Incentives and the Discounting of Depreciation Allowances

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Lawrence H. Summers

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Abstract

This paper examines the discounting of depreciation allowances both theoretically and empirically. Economic theory suggests that depreciation tax shields should be discounted at the after tax riskless rates. However, a survey of 200 major corporations indicates that they employ much higher discount rates to depreciation allowances. Typical discount rates are in the 15 percent range. This finding suggests that "frontloaded" incentives like the ITC provide maximal stimulus to corporate investment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1941.

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Date of creation: Feb 1988
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Handle: RePEc:nbr:nberwo:1941

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Roger H. Gordon & James R. Hines Jr. & Lawrence H. Summers, 1987. "Notes on the Tax Treatment of Structures," NBER Working Papers 1896, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Ruback, Richard S., 1986. "Calculating the market value of riskless cash flows," Journal of Financial Economics, Elsevier, vol. 15(3), pages 323-339, March. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Robert S. Chirinko, 1992. "Business Fixed Investment Spending: A Critical survey of Modeling Strategies, Empirical Results, and Policy Implications," Working Papers 9213, Harris School of Public Policy Studies, University of Chicago. [Downloadable!]
    Other versions:
  2. Joshua Aizenman, 1995. "Investment in New Activities and the Welfare Cost of Uncertainty," NBER Working Papers 5041, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Lawrence H. Summers, 1987. "Should Tax Reform Level the Playing Field?," NBER Working Papers 2132, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Darrel Cohen & Jason Cummins, 2006. "A retrospective evaluation of the effects of temporary partial expensing," Finance and Economics Discussion Series 2006-19, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Lund, Diderik, 2006. "Taxation and systematic risk under decreasing returns to scale," Working Papers 02-2003, Copenhagen Business School, Department of Economics. [Downloadable!]
  6. Diderik Lund, 2002. "Taxation, Uncertainty, and the Cost of Equity," International Tax and Public Finance, Springer, vol. 9(4), pages 483-503, August. [Downloadable!] (restricted)
  7. Magni, Carlo Alberto, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," MPRA Paper 14525, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  8. Jianjun Miao & Neng Wang, 2004. "Risk, Uncertainty, and Option Exercise," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-136, Boston University - Department of Economics. [Downloadable!]
    Other versions:
  9. Elmer, Nicole A. & Thurow, Amy P. & Johnson, Jason L. & Rosson, C. Parr, III, 2001. "An Ex Ante Assessment Of Investments In Texas Grapefruit Under Uncertainty," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 33(03), December. [Downloadable!]
  10. Arvid Raknerud and Rolf Golombek, 2000. "Exit Dynamics with Rational Expectations," Discussion Papers 291, Research Department of Statistics Norway. [Downloadable!]
  11. Magni, Carlo Alberto, 2007. "Investment decisions, net present value and bounded rationality," MPRA Paper 6073, University Library of Munich, Germany. [Downloadable!]
  12. Pierre-Pascal Gendron & Gordon Anderson & Jack M. Mintz, 2003. "Corporation Tax Asymmetries and Firm-Level Investment in Canada," International Tax Program Papers 0303, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto. [Downloadable!]
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