Tax Policy and Abnormal Investment Behavior
This paper studies tax-minimizing investment, whereby firms tilt capital purchases toward fiscal year-end to reduce taxes. Between 1984 and 2016, average investment in fiscal Q4 exceeds the fiscal Q1 through Q3 average by 36%. Q4 spikes occur in the U.S. and internationally. We use this behavior to characterize the mechanisms through which taxes affect corporate investment behavior. Research designs using variation in firm tax positions from administrative data and tax policy changes confirm that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting until fiscal year-end, and cumulative investment levels do not completely reverse after spikes. We develop an investmentmodel with tax asymmetries to rationalize these patterns. In themodel, both a depreciation motive—late-year investments face lower effective tax rates—and an option value motive—tax asymmetry implies time-varying opportunities to minimize taxes—are necessary to fit the data. We document and discuss implications of investment spikes for capital goods suppliers, lenders, and stimulus policy design.
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