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

41 Pages Posted: 9 Apr 2011

Multiple version iconThere are 2 versions of this paper

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

Edgerton, Jesse, Investment, Accounting, and the Salience of the Corporate Income Tax (March 27, 2011). FEDS Working Paper . Available at SSRN: https://ssrn.com/abstract=1805757 or http://dx.doi.org/10.2139/ssrn.1805757

Jesse Edgerton (Contact Author)

JP Morgan ( email )

270 Park Avenue
New York, NY 10027
United States

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