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Tax Policy and Abnormal Investment Behavior

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  • Qiping Xu
  • Eric Zwick

Abstract

This paper studies tax-minimizing investment, whereby firms tilt capital purchases toward fiscal year-end to reduce taxes. Between 1984 and 2016, average investment in fiscal Q4 exceeds the fiscal Q1 through Q3 average by 36%. Q4 spikes occur in the U.S. and internationally. We use this behavior to characterize the mechanisms through which taxes affect corporate investment behavior. Research designs using variation in firm tax positions from administrative data and tax policy changes confirm that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting until fiscal year-end, and cumulative investment levels do not completely reverse after spikes. We develop an investmentmodel with tax asymmetries to rationalize these patterns. In themodel, both a depreciation motive—late-year investments face lower effective tax rates—and an option value motive—tax asymmetry implies time-varying opportunities to minimize taxes—are necessary to fit the data. We document and discuss implications of investment spikes for capital goods suppliers, lenders, and stimulus policy design.

Suggested Citation

  • Qiping Xu & Eric Zwick, 2020. "Tax Policy and Abnormal Investment Behavior," NBER Working Papers 27363, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27363
    Note: CF EFG PE
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    References listed on IDEAS

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    Cited by:

    1. Massenz, Gabriella, 2023. "On the behavioral effects of tax policy," Other publications TiSEM eb44a9f7-b859-480d-b2e4-4, Tilburg University, School of Economics and Management.
    2. Hu, Weiping & Li, Kai & Zhang, Xiao, 2024. "Financial constraints, cash flow timing patterns, and asset prices," Journal of Financial Economics, Elsevier, vol. 157(C).

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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