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The impact of investment incentives: evidence from UK corporation tax returns

Giorgia Maffini (), Jing Xing () and Michael Devereux ()
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Giorgia Maffini: Oxford University Centre for Business Taxation
Jing Xing: Shanghai Jiao Tong University

No 1601, Working Papers from Oxford University Centre for Business Taxation

Abstract: How do tax incentives affect firms' investment? Using confidential UK corporation tax returns, we provide new evidence on the effects of incentives in the form of depreciation allowances. We exploit a 2004 exogenous change in the qualifying thresholds for the first-year depreciation allowances (FYAs) and conduct a difference-in-difference analysis. Results suggest that the investment rate increased between 2.1 and 2.6 percentage points when firms became qualified for FYAs, relative to firms that never qualified. This implies an increase in investment rate of 11 per cent at the mean. We exploit exogenous variation in the timing of tax payments to show that this large effect is not due to an increase in available cash and hence, this is primarily a cost of capital effect. Firms respond rather quickly to FYAs, within 12 to 18 months. Firms also bunch just below notches in the cost of capital created by the qualifying thresholds, suggesting salience of the FYAs. Such behaviour does not drive our main results.

Keywords: investment; corporate tax; depreciation allowances; SMEs. (search for similar items in EconPapers)
JEL-codes: D92 E22 H25 O16 (search for similar items in EconPapers)
Date: 2016
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