Tax Policy and Abnormal Investment Behavior
This paper studies tax-minimizing investment, whereby firms tilt capital purchases toward fiscal year-end to reduce taxes. Between 1984 and 2016, average investment in fiscal Q4 exceeds the fiscal Q1 through Q3 average by 36%. Q4 spikes occur in the U.S. and internationally. We use this behavior to characterize the mechanisms through which taxes affect corporate investment behavior. Research designs using variation in firm tax positions from administrative data and tax policy changes confirm that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting until fiscal year-end, and cumulative investment levels do not completely reverse after spikes. We develop an investmentmodel with tax asymmetries to rationalize these patterns. In themodel, both a depreciation motive—late-year investments face lower effective tax rates—and an option value motive—tax asymmetry implies time-varying opportunities to minimize taxes—are necessary to fit the data. We document and discuss implications of investment spikes for capital goods suppliers, lenders, and stimulus policy design.
The views expressed here are ours and do not necessarily reflect those of the U.S. Treasury Office of Tax Analysis or of the IRS Office of Research, Analysis
and Statistics. We thank Andy Abel, Heitor Almeida, Philip Bond, Jediphi Cabal, Bob Chirinko,Mike Devereux, Martin Feldstein, John Guyton, Jim Hines,Martin Jacob, JustinMurfin, Tom Neubig,Mitchell Petersen, Annette Portz, Jim Poterba, Josh Rauh, Lisa Rupert, Joel Slemrod, Michael Smolyansky, Amir Sufi, Toni Whited, and seminar and conference participants for comments, ideas, and help with data. We thank ThomasWinberry and Irina Telyukova for sharing code. We thank Tianfang (Tom) Cui, Harleen Kaur, Laurence O’Brien, Iris Song, Caleb Wroblewski, and especially thank Francesco Ruggieri for excellent research assistance. Xu thanks theMendoza College of Business at the University of Notre Dame and Gies College of Business at University of Illinois Urbana Champaign for financial support. Zwick gratefully acknowledges financial support from the Neubauer Family Foundation, the Initiative on GlobalMarkets, and the Booth School of Business at the University of Chicago. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.