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The impact of investment incentives: evidence from UK corporation tax returns

Author

Listed:
  • Giorgia Maffini

    (Oxford University Centre for Business Taxation)

  • Jing Xing

    (Shanghai Jiao Tong University)

  • Michael P Devereux

    (Oxford University Centre for Business Taxation)

Abstract

How do tax incentives affect firms' investment? Using confidential UK corporation tax returns, we provide new evidence on the effects of incentives in the form of depreciation allowances. We exploit a 2004 exogenous change in the qualifying thresholds for the first-year depreciation allowances (FYAs) and conduct a difference-in-difference analysis. Results suggest that the investment rate increased between 2.1 and 2.6 percentage points when firms became qualified for FYAs, relative to firms that never qualified. This implies an increase in investment rate of 11 per cent at the mean. We exploit exogenous variation in the timing of tax payments to show that this large effect is not due to an increase in available cash and hence, this is primarily a cost of capital effect. Firms respond rather quickly to FYAs, within 12 to 18 months. Firms also bunch just below notches in the cost of capital created by the qualifying thresholds, suggesting salience of the FYAs. Such behaviour does not drive our main results.

Suggested Citation

  • 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.
    • Handle: RePEc:btx:wpaper:1601
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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/series-15/WP1601.pdf
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    Keywords

    investment; corporate tax; depreciation allowances; SMEs.;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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