A simple explanation for the unfavorable tax treatment of investment costs

The evidence shows that in most countries the present value of depreciation allowances is less than 100% of the cost of capital. In this article we use a real-option model with debt financing, and show that less favorable depreciation allowances are offset by tax benefits arising from debt financing. Allowing partial deduction of capital cost is thus a necessary condition for investment neutrality to hold.

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Year of publication:	2006
Authors:	Panteghini, Paolo M.
Publisher:	Munich : Center for Economic Studies and Ifo Institute (CESifo)

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Series:	CESifo working paper ; 1784
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	517038129 [GVK] hdl:10419/25829 [Handle]
Classification:	D92 - Intertemporal Firm Choice and Growth, Investment, or Financing ; G33 - Bankruptcy; Liquidation
Source:	EconStor