Investment Decisions and Depreciation Choices Under a Discretionary Tax Depreciation Rule

42 Pages Posted: 25 Oct 2014 Last revised: 20 Jan 2017

See all articles by J. Wielhouwer

J. Wielhouwer

Vrije Universiteit Amsterdam

Eelke Wiersma

VU University, Amsterdam; VU University Amsterdam - Department of Accounting

Date Written: September 25, 2014

Abstract

Prior studies have shown limited impact of the US bonus depreciation rules on firm investments during economic downturns. In this article we study the effects of a set of more flexible rules – discretionary tax depreciation (DTD) – introduced in the Netherlands during the 2009-2011 economic crisis. Our simulation results show DTD, which allows firms to accelerate and also to postpone depreciation, to be much more effective than bonus depreciation in reducing the expected value of tax payments, especially in crisis periods. Using a sample of 325 clients of a single office of a Dutch accounting firm, we show that DTD has led to higher investments in assets qualifying for discretionary depreciation for firms that faced the highest marginal tax rate. For other firms, the additional investments crowd out investments in assets that do not qualify for DTD. Our analysis on the actual depreciation choices reveals that firms postpone depreciation when facing losses or loss carryforwards, or to smooth taxable income under the progressive tax system. Our results suggest that a fiscal policy that permits firms to postpone depreciation, as well as to accelerate, may stimulate investment.

Keywords: tax depreciation, bonus depreciation, investments, income smoothing

JEL Classification: H25, H32, D22, E62

Suggested Citation

Wielhouwer, Jacco L. and Wiersma, Eelke and Wiersma, Eelke, Investment Decisions and Depreciation Choices Under a Discretionary Tax Depreciation Rule (September 25, 2014). Available at SSRN: https://ssrn.com/abstract=2501238 or http://dx.doi.org/10.2139/ssrn.2501238

Jacco L. Wielhouwer

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Eelke Wiersma (Contact Author)

VU University, Amsterdam ( email )

Amsterdam, ND North Holland
Netherlands

VU University Amsterdam - Department of Accounting ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

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