The effect of depreciation allowances on the timing of investment and government tax revenue

Abstract

We develop a model of the behavior of a potential investor (under uncertainty and in a fiscal environment) who wishes to invest into a project in the real sector of an economy and faces a timing problem. We find an optimal solution within this model and examine the dependence of the tax revenue from the newly created firm on the depreciation policy. It is shown that there exists a domain in the space of the parameters of the investment project where both the tax revenue and the incentives can be increased by using the depreciation policy.The paper analyzes the problem of creating investment incentives by using tax mechanisms. Suppose the government is interested in the implementation of an investment project aimed at establishing a new enterprise (firm). The absence of such an enterprise might lead, for example, to the necessity of importing goods, which otherwise could be produced by the firm, or to the necessity of paying unemployment benefits, etc. Furthermore, the creation of the enterprise can increase the tax revenues obtained by the state budget. Generally, the government may have many reasons to be interested in establishing the investment project as soon as possible, especially, taking into account the possibility of increasing tax revenues.The government can use certain fiscal mechanisms that can influence the investor's behavior. Important roles are played, in particular by two such mechanisms: (i) changing tax rates and (ii) decreasing the tax base by an appropriate choice of a depreciation policy.We emphasize that such fiscal benefits should be assigned to a project and not to a specific investor (which could lead to corruption). The information about the fiscal benefits is provided for potential investors as part of "the rules of the game."Depreciation, as it is well known, is the economic mechanism for the transfer of the cost of assets to the cost of the product. The depreciation policy mechanism seems to be more

Supporting Innovation Through a Mechanism of Accelerated Depreciation in the Republic of Uzbekistan

“…Along with the use of accelerated depreciation, small businesses can write off a further depreciation of up to 50% of the original cost of fixed assets with a service life of more than three years (Arkin & Slastnikov, 2007).…”

“…Wakeman (1980) has shown that if the tax rate is flat and if taxable income is non-negative in all periods for all available depreciation methods, the accelerated depreciation method is most preferable for tax purposes. With reference to the Russian system of profit taxation, the investment waiting model, which is a development of the McDonald-Siegel model, was proposed by Arkin and Slastnikov (2007). The extension of this model by the introduction of a lag period between the moment of investment and production was studied by Arkin and Slastnikov (2007).…”

“…With reference to the Russian system of profit taxation, the investment waiting model, which is a development of the McDonald-Siegel model, was proposed by Arkin and Slastnikov (2007). The extension of this model by the introduction of a lag period between the moment of investment and production was studied by Arkin and Slastnikov (2007).…”

“…With such a mechanism which influences the process of forming the source of BPA updates, actions must be committed both by the economic entity and the state (Arkin & Slastnikov, 2007). On one hand, the entity must enforce a depreciation policy that takes into account market conditions and is aimed at establishing a depreciation fund.…”

Dynamic tax depreciation strategies

“…Indeed, since the depreciation method affects the timing of tax payments, it affects the net present value of the firm's after-tax revenues. Existing literature shows that tax depreciation can significantly affect the value of the firm and its investment behavior (see, e.g., Arkin and Slastnikov 2007;De Waegenaere et al 2003;Sansing 1998;Wielhouwer et al 2000).…”