Three Essays in Tax Policy and Firm-Level Investment.

This dissertation concerns the impact of government tax policies on firm investment behavior, an important policy topic in light of the recent frequent use of investment-tax policies in the United States. It starts by examining the general effectiveness of an investment-tax policy and proposes an alternative explanation for the puzzling inability of such policies as countercyclical tools. It also investigates financing distortions unintentionally caused by investment-tax policies. The first essay investigates the effectiveness of depreciation policies as investment incentives, by examining investment patterns surrounding the 1999 shortening of the Alternative Minimum Tax (AMT) depreciation recovery periods. With clean identification from the AMT, this essay provides strong evidence that firms subject to the AMT increase their investment, compared to firms subject to the regular tax. By contrast, the 2002 introduction of bonus depreciation, available both for firms subject to the regular tax and for firms subject to the AMT, appears to affect both groups of firms similarly, suggesting that the main result is not likely to be an artifact of firm heterogeneity. The second essay, co-written with James R. Hines, Jr., examines the investment effects of tax subsidies for which some assets and not others are eligible. The 2002 bonus depreciation encourages firms to concentrate investment in tax-favored longer-lived assets. Anticipation of asset substitution makes borrowing more expensive, which in turn discourages investment. Using detailed dataset of debt covenants in the United States, it provides evidence that firms whose investment decisions are more likely to be distorted by the policy are given more restrictive loan terms when the bonus depreciation is available. The third essay derives the demand for leased capital as a function of tax parameters, and uses the model to estimate the responsiveness of leasing to the 2002 bonus depreciation, finding strong evidence that depreciation allowances influence leasing patterns. The deadweight loss associated with the observed financing distortion is also calculated, and the results imply that the responsiveness of firms' leasing behavior to the policy renders the policy case of investment tax incentives weaker than one would expect absent the consideration of leasing response.PhDEconomicsUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/94044/1/jsngpark_1.pd