Explaining Underutilization of Tax Depreciation Deductions: Empirical Evidence from Norway

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.     

LESSORS' DEPRECIATION AND PROFIT-AN APPROACH VIA DEPRIVAL VALUE

Lessor accounting raises intriguing problems. Its accepted methods spread depreciation, and thus profit, in yearly doses whose size jumps capriciously and with scant regard to any principle. Yet the economic qualities of an (asset do not change just because it is leased; the only new factor is the odd way in which tax and interest re-shape its cash flows. If the rules of deprival value are sound for familiar assets, they should be sound too for leased assets. But its arithmetic must expand to cover flows (tax and interest) that are not usually coupled with depreciation. Two results then follow: after-tax profit tends to be constant throughout the lease, and the full size of tax bounty becomes clear.     

Corporate Tax Holidays and Investment

Governments of developing countries commonly adopt tax holidaysto encourage investment. This article evaluates the incentivesprovided by company income tax holidays and explains the importanceof the timing of depreciation allowances in determining theeffective tax rates and the cost of capital to firms consideringadditional investment during the holiday. If an asset is long-livedand depreciation allowances for tax purposes are accelerated,the tax holiday, by preventing depreciation deductions duringperiods of peak profits, may actually penalize a company forinvesting during the holiday. The closer the investment to theend of the holiday period, the more severe the penalty. If,instead, depreciation allowances may be deferred until afterthe holiday, this program of incentives is quite generous tothe firm. How these sharply contrasting results may emerge isillustrated through estimation of effective tax rates and usercosts of capital under tax holiday systems in Bangladesh, Côted'lvoire, Malaysia, Morocco, and Thailand.     

Corporate Leverage and Nondebt Tax Shields: Evidence on Crowding-Out

A negative relationship between corporate leverage and tax shields has been predicted because a large nondebt tax shield reduces the expected value of interest tax savings and lessens the advantage of debt financing. Previous studies, however, have provided inconclusive and contradictory evidence on whether nondebt tax shields crowd-out debt financing. The analysis herein relies on unique constructs of discounted depreciation tax shields and presents evidence that crowding-out does not occur. Furthermore, it is shown that contradictory inferences may result from analysis of annual tax depreciation deductions instead of discounted tax shields. The findings suggest that firms with substantial cash flow from depreciation exploit their higher debt capacity by maintaining a capital structure with significantly more debt than otherwise.     

Do tax incentives affect investment quality?

This paper examines the effect of tax incentives in the form of bonus depreciation on investment quality. Using the expiration of tax incentives via bonus depreciation in eastern Germany and a representative panel of West German establishments, we show that bonus depreciation significantly lowers investment quality. The average quality of investments, measured by the responsiveness of future revenue and other proxies for cash flow to current investment, reduces by 15.2–23.8% in the short run and 31.8–41.4% in the long run. Our research suggests that this adverse effect of tax subsidies is greater for jurisdictions with higher tax rates, in times of high unemployment, and for large or low-productivity establishments. Overall, while increasing investment quantity, as shown by prior literature, tax incentives such as bonus depreciation substantially reduce the quality of investments.     

On the optimal timing of capital taxes

For many kinds of capital, depreciation rates change systematically with the age of the capital. Consider an example that captures essential aspects of human capital, both regarding its accumulation and its depreciation: a worker obtains knowledge in period 0, then uses this knowledge in production in periods 1 and 2, and thereafter retires. Here, depreciation accelerates: it occurs at a 100% rate after period 2, and at a lower (perhaps zero) rate before that. The present paper analyzes the implications of non-constant depreciation rates for the optimal timing of taxes on capital income. The main finding is that under natural assumptions, the path of tax rates over time must be oscillatory. Oscillatory tax rates are optimal when depreciation rates accelerate with the age of the capital (as in the above example), and provided that the government can commit to the path of future tax rates but cannot apply different tax rates in a given year to different vintages of capital.     

Arguments in Favour of Tax Neutral Cost Allocation

When considering corporate taxes in a cost allocation context a trade‐off is generated for shareholders. On the one hand, accelerated depreciation increases the value of a project due to the depreciation tax shield. On the other hand, accelerated depreciation most likely does not induce robust goal congruency between managers and shareholders when utilizing residual income as an incentive system and, as a consequence, over‐ or underinvestment could result. In this context, the literature suggests the application of particular allocation rules. When extending the relative marginal benefits cost allocation rule (Reichelstein, 1997; Rogerson, 1997) to include corporate taxes we find it to be tax neutral and to maintain its properties of generating robust incentives. As a consequence the over‐/underinvestment problem is solved, but the depreciation tax shield is often not maximized. However, we illustrate that in competitive markets shareholders ought to prefer a tax neutral allocation scheme over an accelerated depreciation schedule. Thus, we show that shareholders as well as regulators have—for different reasons—a preference for tax neutral cost allocation.     

The effect of leverage on the tax-cut versus investment-subsidy argument

Two common methods of attracting corporate investment are investment incentives and tax incentives. It is important to use the two incentives in the correct proportions, otherwise the government will give up too much value in the process of attracting investment. This paper examines the effect of tax cut and investment subsidy on the government's net benefit from a project. Earlier studies concluded that it was optimal to use only investment subsidy and no tax cuts. We show that this is not true when debt financing is possible, and it is generally optimal (from the government's perspective) to use a combination of tax reduction and investment subsidy. The optimal tax rate and optimal investment subsidy are identified and analyzed in the paper. It is shown that using a sub-optimal combination of incentives can result in substantial reduction of benefits for the government.     

Tax competition and the international distribution of firm ownership: an invariance result

How does the international distribution of firm ownership affect the outcomes of tax/subsidy competition for mobile plants? As corporate ownership becomes increasingly globalised, this question becomes increasingly important for policy. We prove a strong invariance result in the context of the tax/subsidy competition between two host countries for a monopoly firm’s plant. Both the equilibrium plant location and the equilibrium tax/subsidy offers are independent of the international distribution of the firm’s ownership. The reason is that the tax/subsidy competition equalises the firm’s post-tax profits across countries, making owners of capital indifferent towards the location of production.     

An Analysis of the Effect of Tax Policy on Health Insurance Purchases by Risk Group

There is an extensive body of literature dealing with the welfare loss associated with generous levels of health insurance as a function of the tax subsidy. The theoretical discussion in this study considers the effect of the tax subsidy on pooling within plans, and suggests the hypotheses that the tax subsidy will have a disproportionately positive effect on the likelihood that a high‐risk worker will be eligible for and participate in employment‐based coverage, while the effect of the tax subsidy on plan generosity will be greatest for low‐risk employees. If coverage of high‐risk individuals enhances social welfare, this result may offset, at least in part, the welfare loss associated with generous plans. Data from the 1987 National Medical Expenditure Survey are used to test these hypotheses. The results provide evidence that the subsidy works to expand risk pools in the employment‐based health insurance market.     

Optimal tax depreciation

Currently, solutions to the choice of depreciation methods for tax purposes are obtained through numerical simulation. This paper presents a simple capital budgeting technique which, in conjunction with Descartes' rule of signs, analytically derives the optimal regular depreciation method under the existing U.S. tax code. This technique is then used to determine the optimal depreciable life for short-lived assets and, finally, the analysis is extented to cover the choice of depreciation methods under the Class Life Asset Depreciation Range System.     

UNANTICIPATED INFLATION, TAXATION, AND COMMON STOCKS

This paper focuses on the effects of unanticipated inflation on the market value of equity in a system with corporation tax and historic cost depreciation. It is shown that there exists a unique combination of debt and equity under which inflation neutrality is obtained, Whether or not unanticipated inflation hurts or benefits the stockholders in a particular firm depends upon a number of conditions. These include the depreciation rate of its assets relative to the amortization rate of its debt. Finally, the present tax system is contrasted with a fully indexed system involving replacement cost depreciation and indexation     

加速折旧企业所得税政策与实体企业金融化——基于2014年固定资产加速折旧政策的准自然实验

本文选择2011-2017年我国沪深上市实体企业的样本数据,以2014年固定资产加速折旧所得税政策的出台为准自然实验,采用双重差分法实证检验了固定资产加速折旧政策对实体企业金融化行为的影响。研究发现,固定资产加速折旧政策出台带来的所得税抵税收益在提升实体企业固定资产和无形资产等实业投资的同时,会提升实体企业金融化水平。进一步研究发现,固定资产加速折旧政策的出台仅对现金流较贫乏、非国有企业、成长性较高以及规模较小的实体企业的金融化水平具有显著促进作用。研究结论不仅能够丰富企业金融化的理论研究,还有助于税务监管部门进一步调整优化固定资产加速折旧政策及相关配套税收政策,以便更好地防范、化解脱实向虚风险,促进实体企业高质量发展。     

Performance Measures in Earnings‐Based Financial Covenants in Debt Contracts

This paper examines how performance measures are defined in major earnings‐based financial covenants in loan contracts to shed light on the economic rationales underlying the contractual use of performance measures. I find an earnings‐based covenant is typically based on a performance measure close to earnings before interest, tax, amortization, and depreciation expenses (EBITDA). However, my empirical analyses show that EBITDA is less useful in explaining credit risk than earnings before interest and tax expenses (EBIT) and even the bottom‐line net income. Thus, measuring credit risk cannot fully explain the choice of accounting performance measures in earnings‐based covenants. I conjecture that contracting parties choose an EBITDA‐related measure, instead of a measure calculated after depreciation and amortization expenses (e.g., EBIT), to make the performance measure less sensitive to investment activities, which can be controlled through other contractual terms, such as a restriction on capital expenditure, and provide empirical evidence consistent with this conjecture.     

税收优惠方式对研发投入激励效应研究

以我国2014 ～2020年A股上市公司为样本,利用手工搜集整理的独特数据,获取了上市公司实际享受的税率优惠、加计扣除、加速折旧摊销的金额,并以此为基础检验不同税收优惠方式对企业研发投入的激励效应.实证结果表明,税率优惠、加计扣除、加速折旧摊销这三种税收优惠方式都能激励企业加大研发投入,三种税收优惠方式对研发投入的激励...     

地方政府竞争与对策——基于Justmon-Thisse模型及其扩展的分析

政府竞争是政府运用税收、补贴、基础设施等手段吸引可流动的人力、投资等资源,目的在于促进本地经济的增长,迎合本地居民需要。但是在晋升博弈背景下的政府竞争则由于由官员的收益代替了居民的收益作为地区收益的代表,因此出现了地区基础设施同质化和以高额补助方式进行恶性竞争的招商引资大战。通过对贾斯特曼－蒂斯模型的拓展,我们论证了进行政治体制改革是解决我国政府间恶性竞争的关键,成立具有约束力的区域协调机构或区域合并能够提高本区域的收益水平,通过促进人口自由流动等方式建立“用脚投票”机制,可以作为对政治体制改革滞后的一种有益弥补。     

现行税制缺陷对纳税人的负面影响及对策

国家税收与纳税人的利益休戚相关,特别是税收制度的缺陷将深刻影响企业的发展。现行增值税、所得税税制存在的问题、循环经济的税制障碍以及固定资产折旧政策对企业技术创新产生了负面影响,影响了企业的发展,应加以改进。     

Dynamic effects of permanent and temporary tax policies in a q model of investment

This paper incorporates the tax policy analysis of Hall and Jorgenson into a dynamic optimizing model with adjustment costs to develop a q model of investment. This framework is particularly useful for analyzing the dynamic effects on investment of permanent and temporary changes in tax policy. It is shown that, contrary to the conventional intertemporal substitution argument, a temporary investment tax credit need not be nore expansionary than a permanent investment tax credit. The role of depreciation allowances in determining the dynamic response of investment to temporary changes in the tax rate is also investigated.     

Minimum tax legislation and its effect on corporate financial reporting: A comparative analysis between US and India: a discussion

In this study, the authors investigate imposing a minimum alternative tax (MAT) on Indian corporations during the 1996–1997 budget years. The authors have two objectives: to assess the new legislation's impact on tax revenue, and to determine how corporations responded to its imposition because of its explicit link to financial reporting. They first assess whether, on average, firms with low estimated tax rates before the imposition paid higher taxes after imposition and find, overall, that corporations paid, in total, a greater amount of their income in taxes. They also find that the largest firms in their sample experienced a smaller increase in their effective tax rates than smaller firms did. Next, they assess whether MAT-affected firms altered their financial statement reporting to reduce exposure to the MAT. Specifically, they assess whether a greater portion of MAT-affected firms changed their financial statement depreciation policies than non-MAT-affected firms. They report that, for their sample, a significant number of MAT-affected firms increased their depreciation rate after MAT imposition. The proportion of non-MAT-affected firms changing depreciation rates after imposition was not significant. They also partition MAT- and non-MAT-affected firms on increasing or decreasing book profit and find that MAT-affected firms made proportionally more changes. The authors conclude that the MAT appeared to have increased horizontal equity among taxpayers in India, but its tax revenue enhancement potential is limited by its scope, limited applicability, and avoidance behavior by affected corporations. My comments are directed at what I perceive to be motivational and methodological issues in the paper and the conclusions we can draw from the current representation.     

东北地区企业集团运用税收优惠政策进行纳税筹划探析

东北地区增值税转型的正式启动以及所得税政策的调整,为企业集团运用税收优惠政策开辟了更为广阔的纳税筹划空间。企业集团可使用的具体筹划方式包括获取抵扣资格、投资与税收抵免、加速折旧、研究与开发、集团公司集中理财,等等。