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Do financial frictions amplify fiscal policy? Evidence from business investment stimulus

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  • Eric Zwick

    (University of Chicago Booth, School of Business)

  • James Mahon

    (Harvard University)

Abstract

We estimate the effect of temporary tax incentives on equipment investment using shifts in accelerated depreciation. Analyzing data for over 120,000 firms, we present three findings. First, bonus depreciation raised investment 17.3 percent on average between 2001 and 2004 and 29.5 percent between 2008 and 2010. Second, financially constrained firms respond more than unconstrained firms. Third, firms respond strongly when the policy generates immediate cash flows but not when benefits only come in the future. Implied discount rates are too high to match a frictionless model and cannot be explained entirely by costly finance, unless firms neglect future financial constraints.

Suggested Citation

  • Eric Zwick & James Mahon, 2014. "Do financial frictions amplify fiscal policy? Evidence from business investment stimulus," Working Papers 1415, Oxford University Centre for Business Taxation.
    • Handle: RePEc:btx:wpaper:1415
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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/series-14/WP1415.pdf
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    Cited by:

    1. Fabien Candau & Jacques Le Cacheux, 2017. "Corporate Income Tax as a Genuine Own Resource," Post-Print hal-02633862, HAL.
    2. Danny Yagan, 2015. "Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut," American Economic Review, American Economic Association, vol. 105(12), pages 3531-3563, December.
    3. Clemens Fuest & Li Liu, 2015. "Does ownership affect the impact of taxes on firm behaviour? Evidence from China," Working Papers 1505, Oxford University Centre for Business Taxation.
    4. Gabriel Zucman, 2015. "Grenzüberschreitende Besteuerung: Wie Privatvermögen und Unternehmensgewinne erfasst werden können," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 41(1), pages 13-48.
    5. Hebous, Shafik & Zimmermann, Tom, 2021. "Can government demand stimulate private investment? Evidence from U.S. federal procurement," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 178-194.
    6. Giorgia Maffini & Jing Xing & Michael P Devereux, 2016. "The impact of investment incentives: evidence from UK corporation tax returns," Working Papers 1601, Oxford University Centre for Business Taxation.
    7. Albrizio, Silvia & Lamp, Stefan, 2014. "The investment effect of fiscal consolidation," Economics Working Papers ECO2014/10, European University Institute.
    8. Fabien Candau & Jacques Le Cacheux, 2017. "Corporate Income Tax as a Genuine own Resource," Working papers of CATT hal-01847937, HAL.
    9. Sebastian Eichfelder & Kerstin Schneider, 2014. "Tax Incentives and Business Investment: Evidence from German Bonus Depreciation," CESifo Working Paper Series 4805, CESifo.
    10. Christine L. Dobridge, 2016. "Fiscal Stimulus and Firms: A Tale of Two Recessions," Finance and Economics Discussion Series 2016-13, Board of Governors of the Federal Reserve System (U.S.).
    11. Masud Alam, 2021. "Heterogeneous Responses to the U.S. Narrative Tax Changes: Evidence from the U.S. States," Papers 2107.13678, arXiv.org.
    12. Irem Guceri, 2016. "Will the real R&D employees please stand up? Effects of tax breaks on firm level outcomes," Working Papers 1602, Oxford University Centre for Business Taxation.
    13. Ajay Agrawal & Carlos Rosell & Timothy S. Simcoe, 2014. "Tax Credits and Small Firm R&D Spending," NBER Working Papers 20615, National Bureau of Economic Research, Inc.

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