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  3. American Economic Review
  4. January 2017
  5. Tax Policy and Heterogeneous Investment Behavior

Tax Policy and Heterogeneous Investment Behavior

  • Eric Zwick
  • James Mahon
American Economic Review
vol. 107, no. 1, January 2017
(pp. 217-48)
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Abstract

We estimate the effect of temporary tax incentives on equipment investment using shifts in accelerated depreciation. Analyzing data for over 120,000 firms, we present three findings. First, bonus depreciation raised investment in eligible capital relative to ineligible capital by 10.4 percent between 2001 and 2004 and 16.9 percent between 2008 and 2010. Second, small firms respond 95 percent more than big firms. Third, firms respond strongly when the policy generates immediate cash flows, but not when cash flows only come in the future. This heterogeneity materially affects investment-weighted estimates and supports models in which financial frictions or fixed costs amplify investment responses.

Citation

Zwick, Eric, and James Mahon. 2017. "Tax Policy and Heterogeneous Investment Behavior." American Economic Review, 107 (1): 217-48. DOI: 10.1257/aer.20140855

Additional Materials

JEL Classification

  • D21 Firm Behavior: Theory
  • D22 Firm Behavior: Empirical Analysis
  • D25 Intertemporal Firm Choice, Investment, Capacity, and Financing
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • H25 Business Taxes and Subsidies including sales and value-added (VAT)
  • H32 Fiscal Policies and Behavior of Economic Agents: Firm