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

Jesse Edgerton

No 18472, NBER Working Papers from National Bureau of Economic Research, Inc

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 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.

JEL-codes: G31 H25 H32 M41 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-acc and nep-pbe
Note: CF PE
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Citations: View citations in EconPapers (8)

Published as 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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