Investment, Accounting, and the Salience of the Corporate Income Tax

Jesse Edgerton

NBER Working Paper No. 18472
Issued in October 2012
NBER Program(s):   CF   PE

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.

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Document Object Identifier (DOI): 10.3386/w18472

Published: Investment, Accounting, and the Salience of the Corporate Income Tax, Jesse Edgerton. in Business Taxation (Trans-Atlantic Public Economics Seminar), Devereux and Gordon. 2014

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