Investment, accounting, and the salience of the corporate income tax

Jesse Edgerton ()
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Jesse Edgerton: Federal Reserve Board

No 1230, Working Papers from Oxford University Centre for Business Taxation

Abstract: 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 pay-ments. I model a firm that maximises 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.

Keywords: Investment; taxes; bonus depreciation; expensing; accounting; salience. (search for similar items in EconPapers)
JEL-codes: G31 H25 H32 M41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (7)

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