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Investment Incentives and the Discounting of Depreciation Allowances

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  • Lawrence H. Summers

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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File URL: http://www.nber.org/papers/w1941.pdf
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Bibliographic Info

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: Jun 1986
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Publication status: published as Summers, Lawrence H. "Investment Incentives and the Discounting of Depreciation Allowances," The Effects of Taxation on Capital Accumulation, ed. by Martin Feldstein, Chicago: UCP, 1987.
Handle: RePEc:nbr:nberwo:1941

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References

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  1. Ruback, Richard S., 1986. "Calculating the market value of riskless cash flows," Journal of Financial Economics, Elsevier, vol. 15(3), pages 323-339, March.
  2. Roger H. Gordon & James R. Hines, Jr. & Lawrence H. Summers, 1987. "Notes on the Tax Treatment of Structures," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 223-258 National Bureau of Economic Research, Inc.
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Cited by:
  1. 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.
  2. Wambach, Achim, 2000. "Payback criterion, hurdle rates and the gain of waiting," International Review of Financial Analysis, Elsevier, vol. 9(3), pages 247-258.
  3. Anderson, Edward G., 2001. "Managing the impact of high market growth and learning on knowledge worker productivity and service quality," European Journal of Operational Research, Elsevier, vol. 134(3), pages 508-524, November.
  4. Miao, Jianjun & Wang, Neng, 2011. "Risk, uncertainty, and option exercise," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 442-461, April.
  5. Diderik Lund, 2002. "Taxation, Uncertainty, and the Cost of Equity," International Tax and Public Finance, Springer, vol. 9(4), pages 483-503, August.
  6. Aizenman, Joshua, 1997. "Investment in new activities and the welfare cost of uncertainty," Journal of Development Economics, Elsevier, vol. 52(2), pages 259-277, April.
  7. Lund, Diderik, 2006. "Taxation and systematic risk under decreasing returns to scale," Working Papers 02-2003, Copenhagen Business School, Department of Economics.
  8. Carlo Alberto Magni, 2007. "Project valuation and investment decisions: CAPM versus arbitrage," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(2), pages 137-140.
  9. Lawrence H. Summers, 1987. "Should Tax Reform Level the Playing Field?," NBER Working Papers 2132, National Bureau of Economic Research, Inc.
  10. Auger, Felipe & Ignacio Guzmán, Juan, 2010. "How rational are investment decisions in the copper industry?," Resources Policy, Elsevier, vol. 35(4), pages 292-300, December.
  11. Arvid Raknerud & Rolf Golombek, 2000. "Exit Dynamics with Rational Expectations," Discussion Papers 291, Research Department of Statistics Norway.
  12. 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.).
  13. Gilbert E. Metcalf & Donald Rosenthal, 1995. "The “new” view of investment decisions and public policy analysis: An application to green lights and cold refrigerators," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 14(4), pages 517-531.
  14. Magni, Carlo Alberto, 2007. "Investment decisions, equivalent risk and bounded rationality," MPRA Paper 6073, University Library of Munich, Germany.
  15. Shaanan, Joseph, 2005. "Investment, irreversibility, and options: An empirical framework," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 241-254.
  16. Zodrow, George R., 1995. "Taxation, uncertainty and the choice of a consumption tax base," Journal of Public Economics, Elsevier, vol. 58(2), pages 257-265, October.
  17. Elmer, Nicole A. & Thurow, Amy Purvis & 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.

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