Investment, Accounting, and the Salience of the Corporate Income Tax
41 Pages Posted: 9 Apr 2011
There are 2 versions of this paper
Investment, Accounting, and the Salience of the Corporate Income Tax
Investment, Accounting, and the Salience of the Corporate Income Tax
Date Written: March 27, 2011
Abstract
This paper develops and tests the hypothesis that accounting rules mitigate the impact 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. The cost of capital and the impact of tax incentives for investment both depend on the weight placed on accounting profits. I estimate this weight by comparing the effectiveness of tax incentives that do and do not affect accounting profits. Investment tax credits, which do affect accounting profits, have more impact on investment than accelerated depreciation, which does not. This difference in estimated impact is not obviously driven by discounting, cash flow effects, or measurement error.
Results thus suggest that the tax burden on corporate capital could be lower than we would otherwise estimate, and accelerated depreciation provisions are less effective than they otherwise would be.
Keywords: Investment, taxes, bonus depreciation, expensing, accounting, salience
JEL Classification: H25, H32, G31, M41
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Earnings Management: New Evidence Based on Deferred Tax Expense
By John D. Phillips, Morton Pincus, ...
-
An Evaluation of Alternative Measures of Corporate Tax Rates
-
By Merle Erickson, Michelle Hanlon, ...
-
The Relation between Financial and Tax Reporting Measures of Income
By Gil B. Manzon, Jr. and George Plesko
-
What Can We Infer About a Firm's Taxable Income from its Financial Statements?