Working Paper
A Simple Explanation for the Unfavorable Tax Treatment of Investment Costs
Paolo Panteghini
CESifo, Munich, 2006
CESifo Working Paper No. 1784
CESifo, Munich, 2006
CESifo Working Paper No. 1784
![](https://cesifo.org/DocImg/cesifo1_wp1784.jpg?c=1689236863)
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.
CESifo Category
Public Finance
Public Finance
Keywords: capital structure, irreversibility, real options and taxation
JEL Classification: D920,G330