Tax-Adjusted q Model with Intangible Assets: Theory and Evidence from Temporary Investment Tax Incentives

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, but allowing for heterogeneity reveals that intangible-intensive firms respond more than physical-intensive firms and that this difference is accentuated among large firms. Accounting for intangible assets increases the estimated total investment response from 3.7 to 14.3% of aggregate investment in 2000 among the largest 500 firms. Our results suggest that understanding the behavior of large and intangible-intensive firms matters for investment policy.