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Investment Decisions and Depreciation Choices under a Discretionary Tax Depreciation Rule

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  • Jacco L. Wielhouwer
  • Eelke Wiersma

Abstract

Prior studies have shown limited impact of the US bonus depreciation rules on firm investments during economic downturns. In this article we study the effects of a set of more flexible rules – discretionary tax depreciation (DTD) – introduced in the Netherlands during the 2009–2011 economic crisis. Our simulation results show DTD, which allows firms to accelerate and also to postpone depreciation, to be much more effective than bonus depreciation in reducing the expected value of tax payments, especially in crisis periods. Using a sample of 325 clients of a single office of a Dutch accounting firm, we show that DTD has led to higher investments in assets qualifying for discretionary depreciation for firms that faced the highest marginal tax rate. For other firms, the additional investments crowd out investments in assets that do not qualify for DTD. Our analysis on the actual depreciation choices reveals that firms postpone depreciation when facing losses or loss carry forwards, or to smooth taxable income under the progressive tax system. Our results suggest that a fiscal policy that permits firms to postpone depreciation, as well as to accelerate, may stimulate investment.

Suggested Citation

  • Jacco L. Wielhouwer & Eelke Wiersma, 2017. "Investment Decisions and Depreciation Choices under a Discretionary Tax Depreciation Rule," European Accounting Review, Taylor & Francis Journals, vol. 26(3), pages 603-627, July.
    • Handle: RePEc:taf:euract:v:26:y:2017:i:3:p:603-627
    DOI: 10.1080/09638180.2017.1286250
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    Cited by:

    1. Estian Calitz & Eva Muwanga-Zake & Alexius Sithole & Wynnona Steyn, 2021. "Depreciation allowances in South Africa," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 45(1), pages 1-22, January.
    2. Eichfelder, Sebastian & Jacob, Martin & Schneider, Kerstin, 2020. "Do tax incentives reduce investment quality?," arqus Discussion Papers in Quantitative Tax Research 248, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Eichfelder, Sebastian & Jacob, Martin & Schneider, Kerstin, 2023. "Do tax incentives affect investment quality?," Journal of Corporate Finance, Elsevier, vol. 80(C).
    4. Tang, Meili & Wang, Yu, 2022. "Tax incentives and corporate social responsibility: The role of cash savings from accelerated depreciation policy," Economic Modelling, Elsevier, vol. 116(C).
    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.

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