Claiming Tax Incentives: Heterogeneous impacts on investment and productivity

We investigate firms’ decisions to claim investment tax incentives following the 2014 tax reform in Japan and assess their impacts on investment and productivity. We use an instrumental variable approach to leverage exogenous variation in tax claim decisions. Frequent claimants were financially less constrained firms and those with fewer tax loss carryforwards. On average, tax claimants increased capital expenditures compared to pre-claim levels but did not achieve productivity gains. Further analysis demonstrates that the effects of tax claiming on investment and productivity vary substantially, depending on firms’ financial constraints and tax loss positions. Specifically, financially constrained firms and those with larger tax losses increased productivity upon claiming tax incentives, supporting the effectiveness of countercyclical fiscal policy.