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The GFC Investment Tax Break

Author

Listed:
  • David Rodgers

    (Reserve Bank of Australia)

  • Jonathan Hambur

    (Reserve Bank of Australia)

Abstract

The Australian Government established a temporary tax break for investment as part of its stimulus response to the global financial crisis. The policy gave all businesses undertaking equipment investment extra tax deductions and gave larger deductions to small businesses. We exploit this differential treatment to identify the effect of the tax credit using business-level datasets from the Australian Bureau of Statistics. The key conclusions that emerge are: 1. The tax break had a strong effect on business-level investment. We find this result using both difference-in-differences and regression discontinuity methods. 2. The tax break increased the investment of companies , despite Australia's imputation system for corporate dividends implying that their costs of capital were unaffected. This suggests that a non-standard mechanism, such as a relaxation in financial constraints, underlies part of the response to tax incentives. To the extent that this is the case, it may suggest that such policies are more effective during downturns, when financial constraints are more binding. Relatedly, there is no evidence that businesses responded by bringing forward investment from future years (i.e. intertemporal substitution). 3. The tax break was important on a macroeconomic level. General equilibrium estimates suggest that both GDP growth and the cash rate would have been significantly lower in 2009 without the tax break. While our work suggests that tax rates and breaks can affect real decisions for Australian corporates, despite the existence of the dividend imputation system, it provides only limited guidance on the potential effects of policies other than the one we study. Other policies will differ in terms of their timing, permanence and targeting, all of which could influence their effectiveness.

Suggested Citation

  • David Rodgers & Jonathan Hambur, 2018. "The GFC Investment Tax Break," RBA Research Discussion Papers rdp2018-07, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2018-07
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    References listed on IDEAS

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    Cited by:

    1. Simon, John, 2019. "Ten years of research — What have we learnt since the financial crisis?," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 152-158.
    2. Makin, Anthony J., 2019. "Lessons for macroeconomic policy from the Global Financial Crisis," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 13-25.

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    More about this item

    Keywords

    investment; financial constraints; investment tax breaks;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - 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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