Investment Stimulation by a Depreciation Mechanism

All opinions expressed here are those of the authors and not those of the Economics Education and Research Consortium Research dissemination by the EERC may include views on policy, but the EERC itself takes no institutional policy positions The authors investigate the possibility of utilizing the depreciation mechanism to provide incentives for undertaking investment in the real sector of the Russian econn omy. The proposed model of investor's behavior under risk and uncertainty considd ers a wide range of tax instruments The authors derive the optimal timing rule for investment and depreciation policy which maximizes tax payments into the regional budget. A comparative analysis of the former and new profit taxation systems is carr ried out. The authors discover interdependence of tax holidays and accelerated depreciation, and study the replacement of property tax by real estate tax. They investigate the possibilities of compensating for risk by reducing profit tax rate and changing depreciation policy, and prove the existence of risk zones for which these fiscal mechanisms are nonneffective. Acknowledgements. Authors are grateful to Michael Alexeev and Richard Ericson for a number of useful considerations and discussions. The work was partially supported by grants from the RFBR (project 02206680262) and the RFH (project 0110220415).