Final answer:
The reduction in a firm's tax bill due to depreciation expense is known as the 'depreciation tax shield'. Tax incentives like the R&E tax credit encourage firms to invest more in R&D. Taxes can influence corporate behavior, as seen with the pollution tax encouraging cleaner technologies. Option a
Step-by-step explanation:
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation tax shield. This is because depreciation is a non-cash charge that reduces the taxable income, thus lowering the taxes a company is required to pay.
Depreciation is used to allocate the cost of a tangible asset over its useful life, and, when it is deducted from revenue, it effectively shields some of the company's income from taxation.
Tax breaks like the research and experimentation (R&E) tax credit serve as an incentive for firms to invest in research and development. As the Treasury Department states, this tax credit is considered to be a cost-effective policy for stimulating additional private sector investment, with recent studies showing that it can lead to an equivalent or even higher amount of R&D investment from the private sector.
Moreover, taxes such as the pollution tax can influence company behavior by creating economic incentives for firms to reduce pollution, either by adopting cleaner technologies or by paying the tax, without any loopholes for political favoritism.
This exemplifies how taxes can be used to not only generate revenue for the government but also to encourage certain behaviors within the private sector. Option a