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Understanding U.S. Corporate Tax Losses

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  • Rosanne Altshuler
  • Alan J. Auerbach
  • Michael Cooper
  • Matthew Knittel

Abstract

Recent data present a puzzle: the ratio of corporate tax losses to positive income was much higher around 2001 than in earlier recessions. Using a comprehensive 1982-2005 sample of U.S. corporation tax returns, we explore a variety of potential explanations for this surge in tax losses, taking account of the significant use of executive compensation stock options beginning in the 1990s and recent temporary tax provisions that might have had important effects on taxable income. We find that losses rose because the average rate of return of C corporations fell, rather than because of an increase in the dispersion of returns or an increase in the gap between corporate profits subject to tax and NIPA corporate profits. Our analysis also suggests that the increasing importance of S corporations may help explain the recent experience within the C corporate sector, as S corporations have exhibited a different pattern of losses in recent years. However, we can identify no simple explanation for this differing experience. Our investigation concludes with some new puzzles: why did rates of return of C corporations fall so much early in the decade and why has the incidence of losses among C and S corporations diverged?

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14405.

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Date of creation: Oct 2008
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Publication status: published as Understanding U.S. Corporate Tax Losses , Rosanne Altshuler, Alan J. Auerbach, Michael Cooper, Matthew Knittel. in Tax Policy and the Economy, Volume 23 , Brown and Poterba. 2009
Handle: RePEc:nbr:nberwo:14405

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  1. Alan J. Auerbach, 2007. "Why Have Corporate Tax Revenues Declined? Another Look," CESifo Economic Studies, CESifo, CESifo, vol. 53(2), pages 153-171, June.
  2. Hines, James R, Jr & Rice, Eric M, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(1), pages 149-82, February.
  3. Diego A. Comin & Thomas Philippon, 2006. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 167-228 National Bureau of Economic Research, Inc.
  4. Hamid Mehran & Joseph Tracy, 2001. "The effect of employee stock options on the evolution of compensation in the 1990s," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 17-34.
  5. Rosanne Altshuler & Harry Grubert, 2006. "The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies," Departmental Working Papers, Rutgers University, Department of Economics 200625, Rutgers University, Department of Economics.
  6. 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.
  7. Gordon, Roger H. & Hines, James Jr, 2002. "International taxation," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995 Elsevier.
  8. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-93, May.
  9. Cooper, Michael & Knittel, Matthew, 2006. "Partial Loss Refundability: How Are Corporate Tax Losses Used?," National Tax Journal, National Tax Association, vol. 59(3), pages 651-63, September.
  10. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Working Papers 12354, National Bureau of Economic Research, Inc.
  11. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 61-86, February.
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Cited by:
  1. Dwenger, Nadja & Steiner, Viktor, 2009. "Financial leverage and corporate taxation: Evidence from German corporate tax return data," arqus Discussion Papers in Quantitative Tax Research 61, arqus - Arbeitskreis Quantitative Steuerlehre.
  2. Dwenger, Nadja & Rattenhuber, Pia & Steiner, Viktor, 2011. "Sharing the burden: Empirical evidence on corporate tax incidence," Discussion Papers 2011/19, Free University Berlin, School of Business & Economics.
  3. Alan J. Auerbach, 2009. "Implementing the New Fiscal Policy Activism," American Economic Review, American Economic Association, American Economic Association, vol. 99(2), pages 543-49, May.
  4. Alan Auerbach, 2009. "US Fiscal Policy In Recession: What's Next?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 10(2), pages 3-8, 07.

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