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Tax Loss Carryforwards and Corporate Tax Incentives

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  • Alan J. Auerbach
  • James M. Poterba

Abstract

This paper investigates the extent to which loss-offset constraints affect corporate tax incentives. Using data gathered from corporate annual reports, we estimate that in 1984 fifteen percent of the firms in the nonfinancial corporate sector had tax loss carryforwards. When weighted by their market value, however, these firms account for less than three percent of this sector, suggesting that loss carryforwards are concentrated among small firms and affect relatively few large corporations. For those firms with loss carryforwards, however, the incentive effects of the corporate income tax may differ significantly from those facing taxable firms. We demonstrate this by calculating the effective tax rates on equipment and structures for both types of firms. Our results suggest that firms which are currently taxable have a substantially greater incentive for equipment investment than firms with loss carryforwards, but that loss carryforwards have a relatively smaller effect on the tax incentive for investing in structures. Overall, firms with loss carryforwards receive a smaller investment stimulus than taxable firms.

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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 413.

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Date of creation: Feb 1986
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Handle: RePEc:mit:worpap:413

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Web page: http://econ-www.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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References

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  1. 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.
  2. Don Fullerton, 1988. "The Indexation of Interest, Depreciation, and Capital Gains: A Model ofInvestment Incentives," NBER Working Papers 1655, National Bureau of Economic Research, Inc.
  3. Roger H. Gordon & James R. Hines Jr. & Lawrence H. Summers, 1987. "Notes on the Tax Treatment of Structures," NBER Working Papers 1896, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. 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.
  7. Jack M. Mintz, 1985. "An Empirical Estimate of Imperfect Loss Offsetting and Effective Tax Rates," Working Papers 634, Queen's University, Department of Economics.
  8. 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 571-83, May.
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