Tax Policy and Heterogeneous Investment Behavior

Abstract

We estimate the effect of temporary tax incentives on equipment investment using shifts in accelerated depreciation. Analyzing data for over 120,000 firms, we present three findings. First, bonus depreciation raised investment in eligible capital relative to ineligible capital by 10.4 percent between 2001 and 2004 and 16.9 percent between 2008 and 2010. Second, small firms respond 95 percent more than big firms. Third, firms respond strongly when the policy generates immediate cash flows, but not when cash flows only come in the future. This heterogeneity materially affects investment-weighted estimates and supports models in which financial frictions or fixed costs amplify investment responses. (JEL D21, D22, D92, G31, H25, H32)

How Do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China

“…Studies addressing investment tax incentives in developing countries are very scarce, and the evidence on their eectiveness is even more limited. 7 Second, most of the previous studies on investment tax incentives identify the policy impacts by exploring variations in the tax treatment across industries that dier significantly in terms of capital structure, depreciation schedules, life spans, and so on (e.g., Desai and Goolsbee, 2004;House and Shapiro, 2008;Edgerton, 2010;Zwick and Mahon, 2017). This setting thus gives rise to the concern that industry-specic shocks may coincide with the oer of tax incentives policies, leading to endogeneity problems (Mani et al, 2016;Zwick and Mahon, 2017).…”

“…7 Second, most of the previous studies on investment tax incentives identify the policy impacts by exploring variations in the tax treatment across industries that dier significantly in terms of capital structure, depreciation schedules, life spans, and so on (e.g., Desai and Goolsbee, 2004;House and Shapiro, 2008;Edgerton, 2010;Zwick and Mahon, 2017). This setting thus gives rise to the concern that industry-specic shocks may coincide with the oer of tax incentives policies, leading to endogeneity problems (Mani et al, 2016;Zwick and Mahon, 2017). Our analysis largely avoids this potential pitfall by taking advantage of the variation in the timing of the VAT reform within industries across dierent regions, as well as the variation of tax incentives treatment across dierent rm types (i.e., general VAT taxpayers versus small-scale VAT taxpayers) within industries and regions.…”

“…For all other years, we set weights at bin-level equal to the base-year fraction of rms in a bin divided by the corresponding year fraction of rms in a bin. This reweighting procedure was initially proposed byDiNardo et al (1996) and was recently employed byZwick and Mahon (2017). investment and TFP.…”

Will the real R&D employees please stand up? Effects of tax breaks on firm-level outcomes

“…Hall and Van Reenen (2000) underlines the difficulty and the importance of finding exogenous variation in the user cost of capital to identify the effect of tax incentive-type R&D support policies. The UK policy setting provides a suitable basis for exploiting such exogenous variation, using a difference-in-difference methodology with individual fixed effects, as often applied in public policy contexts (for examples, see Yagan 2015;Zwick and Mahon 2017). In the UK, R&D tax incentives were first introduced for SMEs (in 2000) and then for large companies (in 2002).…”

How Should Business Profit Be Taxed? Some Thoughts on Conceptual Developments During the Lifetime of the IFS*

“…31 See, for example, the recommendations of the OECD in its BEPS Action 4 (OECD, 2015a). 32 For recent evidence, see Zwick and Mahon (2017), Ohrn (2018) and Maffini, Xing and Devereux (2019). 33 For recent evidence, see Faccio and Xu (2015) and Devereux, Maffini and Xing (2018), and for a meta-study, see Feld, Heckemeyer and Overesch (2013).…”