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Understanding U.S. Corporate Tax Losses

In: Tax Policy and the Economy, Volume 23

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

Recent data on corporate tax losses presents a puzzle this paper attempts to explain: the ratio of losses to positive income was much higher around the recession of 2001 than in earlier recessions, even those of greater severity. Using a comprehensive sample of U.S. corporation tax returns for the period 1982-2005, 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 corporate profits as measured by the national income accounts. 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 adifferent pattern of losses in recent years. However, we can identify no simple explanation for the differing experience of C and S corporations. 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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This chapter was published in:
  • Jeffrey R. Brown & James M. Poterba, 2009. "Tax Policy and the Economy, Volume 23," NBER Books, National Bureau of Economic Research, Inc, number pote08-3, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10572.
    Handle: RePEc:nbr:nberch:10572
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    1. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2007. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 107-180 National Bureau of Economic Research, Inc.
    2. 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.
    3. 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.
    4. Rosanne Altshuler & Harry Grubert, 2006. "The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies," Departmental Working Papers 200625, Rutgers University, Department of Economics.
    5. 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.
    6. Hines, James R, Jr & Rice, Eric M, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 149-82, February.
    7. Alan J. Auerbach, 2007. "Why Have Corporate Tax Revenues Declined? Another Look," CESifo Economic Studies, CESifo, vol. 53(2), pages 153-171, June.
    8. Diego Comin & Thomas Philippon, 2005. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Working Papers 11388, National Bureau of Economic Research, Inc.
    9. Roger H. Gordon & James R. Hines Jr., 2002. "International Taxation," NBER Working Papers 8854, National Bureau of Economic Research, Inc.
    10. 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, issue Dec, pages 17-34.
    11. 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.
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