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The Impact of Investment Incentives: Evidence from UK Corporation Tax Returns

Author

Listed:
  • Giorgia Maffini
  • Jing Xing
  • Michael P. Devereux

Abstract

Using UK corporation tax returns, we provide evidence on the effects of accelerated depreciation allowances on investment, exploiting exogenous changes in the qualifying thresholds for first-year depreciation allowances (FYAs) in 2004. The investment rate of qualifying companies increased by 2.1–2.5 percentage points relative to those that did not qualify. We exploit variation in the timing of tax payments to show that this effect is primarily due to the change in the cost of capital, rather than a relaxation of financial constraints. Discontinuity at notches in the cost of capital at the qualifying thresholds does not affect our results.

Suggested Citation

  • Giorgia Maffini & Jing Xing & Michael P. Devereux, 2019. "The Impact of Investment Incentives: Evidence from UK Corporation Tax Returns," American Economic Journal: Economic Policy, American Economic Association, vol. 11(3), pages 361-389, August.
    • Handle: RePEc:aea:aejpol:v:11:y:2019:i:3:p:361-89
    Note: DOI: 10.1257/pol.20170254
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    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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