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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

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.

Suggested Citation

  • John R. Graham & Hyunseob Kim, 2009. "The Effects of the Length of the Tax-Loss Carryback Period on Tax Receipts and Corporate Marginal Tax Rates," NBER Working Papers 15177, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15177
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    File URL: http://www.nber.org/papers/w15177.pdf
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    1. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
    2. Graham, John R., 1996. "Proxies for the corporate marginal tax rate," Journal of Financial Economics, Elsevier, vol. 42(2), pages 187-221, October.
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    Cited by:

    1. Dobridge, Christine L., 2016. "Fiscal Stimulus and Firms: A Tale of Two Recessions," Finance and Economics Discussion Series 2016-13, Board of Governors of the Federal Reserve System (U.S.).
    2. Eric Zwick, 2018. "The Costs of Corporate Tax Complexity," NBER Working Papers 24382, National Bureau of Economic Research, Inc.
    3. repec:spr:schmbr:v:70:y:2018:i:1:d:10.1007_s41464-017-0031-1 is not listed on IDEAS

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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