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Explaining Underutilization of Tax Depreciation Deductions: Empirical Evidence from Norway

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  • Aarbu, Karl Ove
  • MacKie-Mason, Jeffrey K

Abstract

Many corporations do not claim all of their allowable tax depreciation deductions. Intuitively, this kind of behavior might seem odd. However we propose several possible explanations. First, we find strong evidence that firms facing current tax losses or carrying forward past losses underutilize depreciation in order to recover tax losses before they expire. Second, corporations with bad economic performance tend to underutilize their deductions, suggesting that corporations use costly "windowdressing" on their accounting measures. Third, we find support for the hypothesis that tax compliance costs discourage the utilization of accelerated depreciation, especially by small firms. We do not find much support for other hypotheses. For example, we find no evidence of substitution between tax depreciation and private debt due to competition between the benefits of private bank monitoring and the tax savings from using tax allowances to postpone tax payments, as suggested in earlier literature. We also study the effects of the uniform reporting accounting system (typical of many European countries) which can, under certain circumstances, constrain dividends. Forgoing some tax depreciation can loosen the dividend constraint, but the evidence does not support this motivation. Unusual access to extremely detailed individual firm tax return forms in Norway made our empirical analysis possible. In addition, the 1992 Norwegian tax reform provided a natural experiment for testing some of the hypotheses. We use the time-series and cross-sectional variation across Norwegian corporations in 1988, 1991, 1992 and 1993. Copyright 2003 by Kluwer Academic Publishers

Suggested Citation

  • Aarbu, Karl Ove & MacKie-Mason, Jeffrey K, 2003. "Explaining Underutilization of Tax Depreciation Deductions: Empirical Evidence from Norway," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(3), pages 229-257, May.
  • Handle: RePEc:kap:itaxpf:v:10:y:2003:i:3:p:229-57
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    Cited by:

    1. Arnt Ove Hopland & Petro Lisowsky & Mohammed Mardan & Dirk Schindler, 2014. "Income Shifting under Losses," CESifo Working Paper Series 5130, CESifo.
    2. Cui, Wei & Hicks, Jeffrey & Xing, Jing, 2022. "Cash on the table? Imperfect take-up of tax incentives and firm investment behavior," Journal of Public Economics, Elsevier, vol. 208(C).
    3. Johannes Becker & Clemens Fuest & Christoph Spengel, 2006. "Konzernsteuerquote und Investitionsverhalten," Schmalenbach Journal of Business Research, Springer, vol. 58(6), pages 730-742, September.
    4. Johannes Becker & Clemens Fuest, 2006. "Ist Deutschland Hoch‐ oder Niedrigsteuerland? Der Versuch einer Synthese," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(1), pages 35-42, February.
    5. Eichfelder, Sebastian & Knaisch, Jonas & Schneider, Kerstin, 2023. "How does bonus depreciation affect real investment? Effect size, asset structure, and tax planning," arqus Discussion Papers in Quantitative Tax Research 278, arqus - Arbeitskreis Quantitative Steuerlehre.
    6. Tao Zeng, 2010. "Income tax liability for large corporations in China: 1998‐2007," Asian Review of Accounting, Emerald Group Publishing Limited, vol. 18(3), pages 180-196, September.
    7. Becker Johannes & Fuest Clemens, 2006. "Observable Depreciation Deductions and the Effective Marginal Tax Burden on Investment," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 226(4), pages 346-360, August.
    8. Ulrich Schreiber, 2011. "Kommentar zum Beitrag von Ralf Ewert und Rainer Niemann," Schmalenbach Journal of Business Research, Springer, vol. 63(63), pages 132-135, January.

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