Banking

Investment, Accounting, And The Salience Of The Corporate Income Tax

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Executive Summary

This paper develops and tests the hypothesis that accounting rules mitigate the impact of tax policy on investment decisions by obscuring the timing of tax payments. The author models a firm that maximizes a discounted weighted average of after-tax cash flows and accounting profits. The cost of capital and the impact of tax incentives for investment both depend on the weight placed on accounting profits. The author estimates this weight by comparing the effectiveness of tax incentives that do and do not affect accounting profits. Investment tax credits, which do affect accounting profits, have more impact on investment than accelerated depreciation, which does not.

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