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Do Tax Allowances Stimulate Investment?

  • Villy Bergström
  • Jan Södersten
Part of the Scandinavian Journal of Economics book series (SJE)

Abstract

Considerable empirical work on investment behavior makes use of a capital cost variable to capture the effects of various corporate tax allowances. The assumption behind most of this work is that all available tax allowances may be claimed by the firms. However, there are several reasons why this may not be true. One purpose of this paper is to explore the effect on capital cost of assuming that firms have unused tax allowances and that the investment funds system (IF system) is not used to finance marginal investments during periods of IF releases. Another purpose is to construct econometric investment functions in order to compare the performance of alternative definitions of capital cost. In fact, the hypothesis that tax allowances do not have the effect on capital cost implied by a mechanical interpretation of statutory tax rules cannot be rejected. In particular, IF releases may raise the return on intramarginal investment rather than create investment incentives.

Keywords

Cash Flow Capital Cost Capital Gain Capacity Utilization Equity Fund 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© The Scandinavian Journal of Economics 1985

Authors and Affiliations

  • Villy Bergström
    • 1
  • Jan Södersten
    • 1
  1. 1.University of UppsalaSweden

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