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The Significance of Tax Law Asymmetries: An Empirical Investigation

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  • Rosanne Altshuler
  • Alan J. Auerbach

Abstract

This study uses tax return data for U.S. nonfinancial corporations for the period 1971-82 to estimate the importance of restrictions on the ability of firms to use tax credits and to obtain refunds for tax losses. Our results suggest that the incidence of such unused tax benefits increased substantially during the early 1980s, though we do not find these increases attributable to increased investment incentives during that period. Using estimates of a three-state (taxable, not taxable, partially taxable) transition probability model, we calculate the effective tax rates on various types of investments undertaken by firms differing with respect to tax status. We confirm previous findings about the marginal tax rate on interest payments, and that it is important to distinguish current tax payments from marginal tax rates in estimating the incentive to invest.

Suggested Citation

  • Rosanne Altshuler & Alan J. Auerbach, 1987. "The Significance of Tax Law Asymmetries: An Empirical Investigation," NBER Working Papers 2279, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2279
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    References listed on IDEAS

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    1. Alan J. Auerbach & David Reishus, 1988. "The Effects of Taxation on the Merger Decision," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 157-190, National Bureau of Economic Research, Inc.
    2. Alan J. Auerbach & James M. Poterba, 1987. "Why Have Corporate Tax Revenues Declined?," NBER Chapters, in: Tax Policy and the Economy, Volume 1, pages 1-28, National Bureau of Economic Research, Inc.
    3. Cooper, Ian & Franks, Julian R, 1983. "The Interaction of Financing and Investment Decisions When the Firm Has Unused Tax Credits," Journal of Finance, American Finance Association, vol. 38(2), pages 571-583, May.
    4. Alan J. Auerbach, 1986. "The Dynamic Effects of Tax Law Asymmetries," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(2), pages 205-225.
    5. Cordes, Joseph J & Sheffrin, Steven M, 1983. "Estimating the Tax Advantage of Corporate Debt," Journal of Finance, American Finance Association, vol. 38(1), pages 95-105, March.
    6. Alan J. Auerbach & James M. Poterba, 1987. "Tax-Loss Carryforwards and Corporate Tax Incentives," NBER Chapters, in: Taxes and Capital Formation, pages 89-92, National Bureau of Economic Research, Inc.
    7. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    8. Jack M. Mintz, 1985. "An Empirical Estimate of Imperfect Loss Offsetting and Effective Tax Rates," Working Paper 634, Economics Department, Queen's University.
    9. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    10. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
    11. Saman Majd & Stewart C. Myers, 1985. "Valuing the Government's Tax Claim on Risky Corporate Assets," NBER Working Papers 1553, National Bureau of Economic Research, Inc.
    12. Colin Mayer, 1986. "Corporation Tax, Finance and the Cost of Capital," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 93-112.
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