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Tax Incentives and Business Investment: Evidence from German Bonus Depreciation

Author

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  • Sebastian Eichfelder
  • Kerstin Schneider
Abstract
In this paper, we use an exogenous variation in tax regulations to analyze the impact of bonus depreciation programs on business investment. To promote economic convergence of Eastern and Western Germany after reunification, bonus depreciation tax incentives were granted for investments in Eastern Germany before 1999. Using business establishments in Western Germany as control group, we address the question if and to what extent these investment tax incentives boosted investment. In line with the theoretical literature, there is empirical evidence for strong and significant effects of the bonus depreciation program. The effects were stronger for long-lived capital goods, large businesses, and investments before the tax incentives were cut back in 1997. Moreover, there was a significant reduction in building investment in the year after the expiration of the program. This provides evidence for a ‘shifting’ of investment between periods with higher and lower benefits.

Suggested Citation

  • Sebastian Eichfelder & Kerstin Schneider, 2014. "Tax Incentives and Business Investment: Evidence from German Bonus Depreciation," CESifo Working Paper Series 4805, CESifo.
    • Handle: RePEc:ces:ceswps:_4805
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fackler, Daniel, 2014. "Establishment survival in East and West Germany: A comparative analysis," Discussion Papers 90, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    2. Dobbins, Laura & Eichfelder, Sebastian & Hechtner, Frank & Hundsdoerfer, Jochen, 2018. "Intertemporal income shifting around a large tax cut: The case of depreciations," arqus Discussion Papers in Quantitative Tax Research 229, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Sebastian Siegloch & Nils Wehrhöfer & Tobias Etzel, 2022. "Spillover, Efficiency and Equity Effects of Regional Firm Subsidies," ECONtribute Discussion Papers Series 210, University of Bonn and University of Cologne, Germany.
    4. Laura Dobbins & Sebastian Eichfelder & Frank Hechtner & Jochen Hundsdoerfer, 2018. "Intertemporal Income Shifting Around a Large Tax Cut: the Case of Depreciations," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 70(4), pages 313-340, November.
    5. Samvel S. Lazaryan & Mariya A. Chernotalova, 2017. "Taxes Impact on Private Investment," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 3, pages 71-84, June.
    6. Lerche, Adrian, 2019. "Investment Tax Credits and the Response of Firms," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203526, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    business taxes; bonus depreciation; investment; tax incentive; investment tax incentive;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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