A Simple Explanation for the Unfavorable Tax Treatment of Investment Costs

17 Pages Posted: 26 Sep 2006

See all articles by Paolo M. Panteghini

Paolo M. Panteghini

Department of Economics and Management; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: August 2006

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

JEL Classification: D92, G12, G33, H25

Suggested Citation

Panteghini, Paolo M., A Simple Explanation for the Unfavorable Tax Treatment of Investment Costs (August 2006). CESifo Working Paper Series No. 1784, Available at SSRN: https://ssrn.com/abstract=932489

Paolo M. Panteghini (Contact Author)

Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
75
Abstract Views
1,161
rank
344,711
PlumX Metrics