Tax Policy and Heterogeneous Investment Behavior
We estimate the effect of temporary tax incentives on equipment investment using shifts in accelerated depreciation. Analyzing data for over 120,000 firms, we present three findings. First, bonus depreciation raised investment in eligible capital relative to ineligible capital by 10.4% between 2001 and 2004 and 16.9% between 2008 and 2010. Second, small firms respond 95% more than big firms. Third, firms respond strongly when the policy generates immediate cash flows but not when cash flows only come in the future. This heterogeneity materially affects aggregate estimates and supports models in which financial frictions or fixed costs amplify investment responses.
This paper previously circulated with the title, “Do Financial Frictions Amplify Fiscal Policy? Evidence from Business Investment Stimulus.” Zwick thanks Raj Chetty, David Laibson, Josh Lerner, David Scharfstein, and Andrei Shleifer for extensive advice and support. We thank Gary Chamberlain, George Contos, Ian Dew-Becker, Fritz Foley, Paul Goldsmith-Pinkham, Robin Greenwood, Sam Hanson, Ron Hodge, John Kitchen, Pat Langetieg, Day Manoli, Isaac Sorkin, Larry Summers, Adi Sunderam, Nick Turner, Tom Winberry, Danny Yagan, Moto Yogo, and seminar and conference participants for comments, ideas, and help with data. Tom Cui and Prab Upadrashta provided excellent research assistance. We are grateful to our colleagues in the US Treasury Office of Tax Analysis and the IRS Office of Research, Analysis, and Statistics—especially Curtis Carlson, John Guyton, Barry Johnson, Jay Mackie, Rosemary Marcuss, and Mark Mazur—for making this work possible. The views expressed here are ours and do not necessarily reflect those of the US Treasury Office of Tax Analysis, nor of the IRS Office of Research, Analysis and Statistics, nor of the National Bureau of Economic Research. Zwick gratefully acknowledges financial support from the Harvard Business School Doctoral Office, and the Neubauer Family Foundation and Booth School of Business at the University of Chicago.
- Allowing accelerated depreciation of capital equipment raised investment an average of 10.4 percent a year between 2001 and 2004 and...
Eric Zwick & James Mahon, 2017. "Tax Policy and Heterogeneous Investment Behavior," American Economic Review, American Economic Association, vol. 107(1), pages 217-248, January. citation courtesy of