Do Tax Incentives Reduce Investment Quality?

45 Pages Posted: 31 Jan 2020 Last revised: 30 Apr 2021

See all articles by Sebastian Eichfelder

Sebastian Eichfelder

Otto-von-Guericke-Universität Magdeburg

Martin Jacob

WHU - Otto Beisheim School of Management

Kerstin Schneider

University of Wuppertal - Department of Economics

Date Written: January 8, 2020

Abstract

This paper examines the effect of tax incentives in the form of bonus depreciation on the quality of investment. Using the expiration of tax incentives via bonus depreciation in East Germany and a representative panel of West German establishments, we show that bonus depreciation significantly lowers the quality of investment. The average quality of investments, measured by the responsiveness of future sales to current investment, reduces by 22.6–34.6%. This adverse effect of tax subsidies is greater for jurisdictions with higher tax rates as well as for large or high-productivity firms. Overall, while increasing investment quantity, as shown by prior literature, tax incentives such as bonus depreciation substantially reduce the quality of investments.

Keywords: bonus depreciation, tax incentive, investment incentive, investment quality

JEL Classification: G11, H25, H32, M41

Suggested Citation

Eichfelder, Sebastian and Jacob, Martin and Schneider, Kerstin, Do Tax Incentives Reduce Investment Quality? (January 8, 2020). TRR 266 Accounting for Transparency Working Paper Series No. 21, Available at SSRN: https://ssrn.com/abstract=3515852 or http://dx.doi.org/10.2139/ssrn.3515852

Sebastian Eichfelder (Contact Author)

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany
0391-67-18811 (Phone)

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Kerstin Schneider

University of Wuppertal - Department of Economics ( email )

42097 Wuppertal
Germany

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