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The Effects of the Length of the Tax-Loss Carryback Period on Tax Receipts and Corporate Marginal Tax Rates

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  • John R. Graham
  • Hyunseob Kim
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    Abstract

    We investigate how the length of the net operating loss carryback period affects corporate liquidity and marginal tax rates. We estimate that extending the carryback period from two to five years, as recently proposed in President Obama’s budget blueprint, would provide $19 ($34) billion of additional liquidity to the corporate sector for 2008 (2009). Our calculations imply that the benefits of the extended carryback period would be concentrated in the homebuilding, automobile, and financial industries. Extending the carryback period would increase the marginal tax rate of loss firms by more than 200 basis points on average, which all else equal would lead corporations to use an additional $8 ($10) billion of debt and reduce tax payments by another $1.2 ($1.5) billion in 2008 (2009). Overall, the tax break proposed by the Obama administration would have a significant liquidity effect on corporations suffering large losses in recent years. If the tax proposal were extended to include TARP firms, the liquidity effect would triple in size.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15177.

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    Date of creation: Jul 2009
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    Publication status: published as Graham, John R., and Hyunseob Kim, 2009, The Effects of the Length of the Tax-Loss Carryback Period on Tax Receipts and Corporate Marginal Tax Rates National Tax Journal 62, 413-427.
    Handle: RePEc:nbr:nberwo:15177

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    1. Graham, John R., 1996. "Proxies for the corporate marginal tax rate," Journal of Financial Economics, Elsevier, Elsevier, vol. 42(2), pages 187-221, October.
    2. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, Elsevier, vol. 41(1), pages 41-73, May.
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