IDEAS home Printed from https://ideas.repec.org/a/eee/ecofin/v66y2023ics106294082300030x.html
   My bibliography  Save this article

Inflation-related tax distortions in business valuation models: A clarification

Author

Listed:
  • Kim-Duc, Nguyen
  • Nam, Pham Khanh

Abstract

The current corporate income tax (CIT) expense occupies just one line item on the statement of profit or loss and other comprehensive income. However, it is a unique line item following tax rules and not financial reporting rules. The difference between these rules is that it reflects the effective tax rate (ETR), which can differ from the statutory tax rate (STR). With inflation, this ETR-STR difference can be more significant due to the contribution of tax distortions. In this study, we expand on the standard formulas for the ETR by analyzing the effects of inflation-related tax distortions when computed under the following four cases: (i) Historical-cost-based accounting under a nominal tax basis, (ii) Fair-value-based accounting under a nominal tax basis, (iii) Historical-cost-based accounting under a real tax basis, and (iv) Fair-value-based accounting under a real tax basis. Further, we suggest a modified model for business valuation considering these tax distortions and provide a general formula to independently calculate the value of inflation-related tax distortions.

Suggested Citation

  • Kim-Duc, Nguyen & Nam, Pham Khanh, 2023. "Inflation-related tax distortions in business valuation models: A clarification," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).
  • Handle: RePEc:eee:ecofin:v:66:y:2023:i:c:s106294082300030x
    DOI: 10.1016/j.najef.2023.101907
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S106294082300030X
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.najef.2023.101907?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:eme:mfppss:mf-09-2017-0335 is not listed on IDEAS
    2. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
    3. Martin Feldstein, 1983. "Inflation, Tax Rules, and the Stock Market," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 199-220, National Bureau of Economic Research, Inc.
    4. Zurita, Salvador & Castillo, Augusto & Niño, Jorge, 2019. "Inflation, tax integration and company valuation: The Latin American case," Journal of Business Research, Elsevier, vol. 105(C), pages 370-380.
    5. Kanniainen, Vesa & Sodersten, Jan, 1995. "The importance of reporting conventions for the theory of corporate taxation," Journal of Public Economics, Elsevier, vol. 57(3), pages 417-430, July.
    6. Kim, Moon K, 1979. "Inflationary Effects in the Capital Investment Process: An Empirical Examination," Journal of Finance, American Finance Association, vol. 34(4), pages 941-950, September.
    7. Dyreng, Scott D. & Hanlon, Michelle & Maydew, Edward L. & Thornock, Jacob R., 2017. "Changes in corporate effective tax rates over the past 25 years," Journal of Financial Economics, Elsevier, vol. 124(3), pages 441-463.
    8. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-565, September.
    9. Wolfgang Schultze, 2004. "Valuation, Tax Shields And The Cost-Of-Capital With Personal Taxes: A Framework For Incorporating Taxes," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(06), pages 769-804.
    10. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    11. Maher, Mw & Nantell, Tj, 1983. "The Tax Effects Of Inflation - Depreciation, Debt, And Miller Equilibrium Tax Rates," Journal of Accounting Research, Wiley Blackwell, vol. 21(1), pages 329-340.
    12. Deborah Knirsch, 2007. "Measuring tax distortions with neutrality-based effective tax rates," Review of Managerial Science, Springer, vol. 1(2), pages 151-165, August.
    13. Robert A. Taggart & Jr., 1991. "Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes," Financial Management, Financial Management Association, vol. 20(3), Fall.
    14. Nelson, Charles R, 1976. "Inflation and Capital Budgeting," Journal of Finance, American Finance Association, vol. 31(3), pages 923-931, June.
    15. Martin Feldstein, 1999. "Introduction to "Costs and Benefits of Price Stability, The"," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 1-8, National Bureau of Economic Research, Inc.
    16. Christian Koziol, 2014. "A simple correction of the WACC discount rate for default risk and bankruptcy costs," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 653-666, May.
    17. Martin Feldstein, 1999. "The Costs and Benefits of Price Stability," NBER Books, National Bureau of Economic Research, Inc, number feld99-1, March.
    18. Ian A. Cooper & Kjell G. Nyborg, 2018. "Consistent valuation of project finance and LBOs using the flows†to†equity method," European Financial Management, European Financial Management Association, vol. 24(1), pages 34-52, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nguyen Kim-Duc & Pham Khanh Nam, 2024. "Consistent valuation: extensions from bankruptcy costs and tax integration with time-varying debt," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 719-754, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bae, Jinho & Nelson, Charles R., 2007. "Earnings growth and the bull market of the 1990s: Is there a case for rational exuberance?," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 690-707, December.
    2. Nguyen Kim-Duc & Pham Khanh Nam, 2024. "Consistent valuation: extensions from bankruptcy costs and tax integration with time-varying debt," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 719-754, February.
    3. Ji Seon Yoo & Ye Ji Lee, 2019. "National Culture and Tax Avoidance of Multinational Corporations," Sustainability, MDPI, vol. 11(24), pages 1-28, December.
    4. Erin Henry & Richard Sansing, 2018. "Corporate tax avoidance: data truncation and loss firms," Review of Accounting Studies, Springer, vol. 23(3), pages 1042-1070, September.
    5. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
    6. Gerhard Rösl & Karl-Heinz Tödter, 2017. "The Financial Repression Policy of the European Central Bank: Interest Income and Welfare Losses for German Savers," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(01), pages 05-08, April.
    7. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.
    8. Sanz Labrador, Ismael & Sanz-Sanz, José Félix, 2013. "Política fiscal y crecimiento económico: consideraciones microeconómicas y relaciones macroeconómicas," Macroeconomía del Desarrollo 5367, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    9. Bampinas, Georgios & Panagiotidis, Theodore, 2016. "Hedging inflation with individual US stocks: A long-run portfolio analysis," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 374-392.
    10. Ralf Diedrich & Stefan Dierkes & Hans-Christian Gröger, 2022. "A note on the cost of capital with fixed payout ratios," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1559-1575, November.
    11. Fischer, Max & Krause, Marko & Lahmann, Alexander & Stimper, Franziska, 2022. "Firm valuation with state dependent COD taxation," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 550-561.
    12. Hunjra, Ahmed Imran & Chani, Muhammad Irfan & Ijaz, Muhammad Shahzad & Farooq, Muhammad & Khan, Kamran, 2014. "The Impact of Macroeconomic Variables on Stock Prices in Pakistan," MPRA Paper 60791, University Library of Munich, Germany.
    13. Athira, A. & Ramesh, Vishnu K., 2023. "COVID-19 and corporate tax avoidance: International evidence," International Business Review, Elsevier, vol. 32(4).
    14. Kozo Ueda, 2001. "Costs of Inflation in Japan: Tax and Resource Allocation," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    15. Müller, Raphael & Spengel, Christoph & Weck, Stefan, 2021. "How do investors value the publication of tax information? Evidence from the European public country-by-country reporting," ZEW Discussion Papers 21-077, ZEW - Leibniz Centre for European Economic Research.
    16. Pindyck, Robert S, 1984. "Risk, Inflation, and the Stock Market," American Economic Review, American Economic Association, vol. 74(3), pages 335-351, June.
    17. Shiratsuka, Shigenori, 2001. "Is There a Desirable Rate of Inflation? A Theoretical and Empirical Survey," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(2), pages 49-83, May.
    18. Madsen, Jakob B., 2002. "The share market boom and the recent disinflation in the OECD countries: the tax-effects, the inflation-illusion and the risk-aversion hypotheses reconsidered1," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(1), pages 115-141.
    19. Saira Tufail & Sadia Batool, 2013. "An Analysis of the Relationship between Inflation and Gold Prices: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 1-35, July-Dec.
    20. Gerhard R?sl & Karl-Heinz T?dter, 2015. "The Costs and Welfare Effects of ECB's Financial Repression Policy: Consequences for German Savers," Review of Economics & Finance, Better Advances Press, Canada, vol. 5, pages 42-59, November.

    More about this item

    Keywords

    Firm valuation; Inflation; Tax distortions; Effective tax rates; Adjusted Present Value (APV);
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecofin:v:66:y:2023:i:c:s106294082300030x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620163 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.