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Accounting for intangible assets increases the estimated ..... The largest 500 firms represent 26 percent of total physical investment, the largest ...... we use BEA's capital flow table on investment in equipment, software and structures for 20 two-.
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WP/14/104

The Tax-adjusted Q Model with Intangible Assets: Theory and Evidence from Temporary Investment Tax Incentives Sophia Chen and Estelle P. Dauchy

WP/14/104

© 2014 International Monetary Fund

IMF Working Paper Research Department The Tax-adjusted Q Model with Intangible Assets: Theory and Evidence from Temporary Investment Tax Incentives Prepared by Sophia Chen and Estelle P. Dauchy1 Authorized for distribution by Giovanni Dell’Ariccia June 2014

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Abstract We propose a tax-adjusted q model with physical and intangible assets and estimate the effect of bonus depreciation in the United States in the early 2000s. We find that investment responds moderately to tax incentives; however allowing for heterogeneity reveals that intangible-intensive firms are more responsive than physical-intensive firms and their differences increase with firm size. Accounting for intangible assets increases the estimated total investment response from 3.7 to 14.3 percent among the largest 500 firms. Our results imply that understanding the behavior of large and intangible-intensive firms has important implications for the design and evaluation of investment policy. JEL Classification Numbers: H25, G31, E01 Keywords: investment tax incentives, intangible assets, q model of investment, bonus depreciation Author’s E-Mail Address:[email protected], [email protected] 1

Estelle P. Dauchy (corresponding author): New Economic School, der. Skolkovo, st. Novaya, 100, building "Ural", office 2.24, Moscow 143025, Russia. We thank participants at various seminars and conferences for helpful comments. We thank Zhou Yi (Joey) for research assistance.

2 Contents

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I. Introduction ............................................................................................................................3 II. Intangible Assets and Tax-Adjusted Q: Theory ....................................................................5 A. The model .................................................................................................................5 B. Short-run Approximations of Long-lived Assets ......................................................7 III. Methodology and Data .........................................................................................................9 A. Bonus Depreciation Allowances ...............................................................................9 B. Methodology .............................................................................................................9 Empirical specifications .....................................................................................9 Econometric methods.......................................................................................11 C. Data .........................................................................................................................12 D. Summary Statistics ..................................................................................................13 IV. Results................................................................................................................................14 A. Baseline Results ......................................................................................................14 B. Results Comparison.................................................................................................16 C. The Economic Size of the Impact of Bonus Depreciation ......................................16 V. Conclusion ..........................................................................................................................17 Tables 1. Summary Sta