Investment, accounting, and the salience of the corporate income tax
This paper develops and tests the hypothesis that accounting rules mitigate the impact of tax policy on investment decisions by obscuring the timing of tax payments. I model a firm that maximizes a discounted weighted average of after-tax cash flows and accounting profits. The cost of capital and the impact of tax incentives for investment both depend on the weight placed on accounting profits. I estimate this weight by comparing the effectiveness of tax incentives that do and do not affect accounting profits. Investment tax credits, which do affect accounting profits, have more impact on investment than accelerated depreciation, which does not. This difference in estimated impact is not obviously driven by discounting, cash flow effects, or measurement error. Results thus suggest that the tax burden on corporate capital could be lower than we would otherwise estimate, and accelerated depreciation provisions are less effective than they otherwise would be.
|Date of creation:||2011|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Raj Chetty & Adam Looney & Kory Kroft, 2009.
"Salience and Taxation: Theory and Evidence,"
American Economic Review,
American Economic Association, vol. 99(4), pages 1145-77, September.
- Looney, Adam & Kroft, Kory & Chetty, Raj, 2009. "Salience and Taxation: Theory and Evidence," Scholarly Articles 9748525, Harvard University Department of Economics.
- Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series 2009-11, Board of Governors of the Federal Reserve System (U.S.).
- Raj Chetty & Adam Looney & Kory Kroft, 2007. "Salience and Taxation: Theory and Evidence," NBER Working Papers 13330, National Bureau of Economic Research, Inc.
- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
- Michelle Hanlon & Terry Shevlin, 2005. "Bank-Tax Conformity for Corporate Income: An Introduction to the Issues," NBER Working Papers 11067, National Bureau of Economic Research, Inc.
- Keating, A. Scott & L. Zimmerman, Jerold, 1999. "Depreciation-policy changes: tax, earnings management, and investment opportunity incentives," Journal of Accounting and Economics, Elsevier, vol. 28(3), pages 359-389, December.
When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2011-20. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.