A Simple Explanation for the Unfavorable Tax Treatment of Investment Costs

Paolo Panteghini

No 1784, CESifo Working Paper Series from CESifo

Abstract: The evidence shows that in most countries the present value of depreciation allowances is less than 100% of the cost of capital. In this article we use a real-option model with debt financing, and show that less favorable depreciation allowances are offset by tax benefits arising from debt financing. Allowing partial deduction of capital cost is thus a necessary condition for investment neutrality to hold.

Keywords: capital structure; irreversibility; real options and taxation (search for similar items in EconPapers)
JEL-codes: D92 G33 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-acc, nep-fin, nep-fmk and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp1784.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1784

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().