Investment Decisions and Depreciation Choices under a Discretionary Tax Depreciation Rule

Research output: Contribution to JournalArticleAcademicpeer-review

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.

Original languageEnglish
Pages (from-to)603-627
Number of pages25
JournalEuropean Accounting Review
Volume26
Issue number3
DOIs
Publication statusPublished - 2017

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Depreciation
Tax
Investment decision
Bonus
Assets
Accounting firms
Economic crisis
Progressive taxes
Firm investment
Economic downturn
Crowd-out
The Netherlands
Expected value
Taxable income
Payment
Simulation
Tax system
Fiscal policy
Marginal tax rate

Cite this

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Investment Decisions and Depreciation Choices under a Discretionary Tax Depreciation Rule. / Wielhouwer, Jacco L.; Wiersma, E.

In: European Accounting Review, Vol. 26, No. 3, 2017, p. 603-627.

Research output: Contribution to JournalArticleAcademicpeer-review

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