Investment, Accounting, and the Salience of the Corporate Income Tax
This paper develops and tests the hypothesis that accounting rules mitigate the effect of tax policy on firm 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. I estimate the weight placed on accounting profits by comparing the effectiveness of tax incentives that do and do not affect them. Investment tax credits, which do affect accounting profits, have larger effects on investment than accelerated depreciation, which does not. This difference in estimated effects is not obviously driven by discounting, cash flow effects, or measurement error. Results thus suggest that accelerated depreciation provisions are less effective than they otherwise would be and that the corporate income tax could create smaller distortions to investment decisions than we would otherwise estimate.
You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.
Forthcoming as Investment, Accounting, and the Salience of the Corporate Income Tax, Jesse Edgerton, in Trans-Atlantic Public Economics Seminar, (American Economic Association) American Economic Journal: Economic Policy, May 2014
Users who downloaded this paper also downloaded these: