Abstract: Standard models of investment usually incorporate various tax
factors but often overlook "tax exhaustion," the case when a firm
has negative taxable income and cannot claim immediately its tax deductions
or credits. However, tax exhausted firms face a higher cost of capital, and
evidence shows that tax exhaustion is not uncommon. This paper
incorporates tax exhaustion into a "Q" model of investment to see whether
its performance is improved. In addition, leased investment is fully
incorporated into the model, in part because tax exhaustion creates
incentives to lease investment products and because investment models explain
decisions to use equipment, not the decision about how to finance them. The
results show that accounting for leasing improves significantly the
performance of the Q model, whereas accounting for tax exhaustion does not
affect the results meaningfully.
Keywords: Investment, corporate taxation, leasing
Full paper (181 KB PDF)
| Full paper (368 KB Postscript)
Home | Economic research and data | FR working papers | FEDS | 1996 FEDS papers
Accessibility
To comment on this site, please fill out our feedback form.
Last update: July 16, 1997
|