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A Simple Explanation for the Unfavorable Tax Treatment of Investment Costs

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  • Paolo Panteghini

Abstract

The evidence shows that in most countries the present value of depreciation allowances is less than 100% of the cost of capital. In this article we use a real-option model with debt financing, and show that less favorable depreciation allowances are offset by tax benefits arising from debt financing. Allowing partial deduction of capital cost is thus a necessary condition for investment neutrality to hold.

Suggested Citation

  • Paolo Panteghini, 2006. "A Simple Explanation for the Unfavorable Tax Treatment of Investment Costs," CESifo Working Paper Series 1784, CESifo.
    • Handle: RePEc:ces:ceswps:_1784
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    References listed on IDEAS

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    More about this item

    Keywords

    capital structure; irreversibility; real options and taxation;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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