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The ability of deferred tax to predict future tax

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  • Kim Mear
  • Michael Bradbury
  • Jill Hooks

Abstract

We examine the usefulness of tax allocation accounting (deferred tax) for predicting future tax paid and future tax expense. Deferred taxes increase the explanatory power (R2) of regression models where future taxes paid or future tax expense is the dependent variable. However, the mean out‐of‐sample forecast errors for tax paid (future tax expense) is 30 (45.5) percent. Deferred tax increases predictive ability on pooled data, but is inconsistent on a year‐by‐year basis. We examine three explanations for poor predictive ability: losses, tax changes and asset growth. We discuss the policy and practical implications of our findings.

Suggested Citation

  • Kim Mear & Michael Bradbury & Jill Hooks, 2021. "The ability of deferred tax to predict future tax," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 241-264, March.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:1:p:241-264
    DOI: 10.1111/acfi.12564
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    References listed on IDEAS

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