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Understanding U.S. Corporate Tax Losses

  • Rosanne Altshuler

    ()

    (Rutgers University, Department of Economics)

  • Alan Auerbach

    ()

    (University of California, Berkeley)

  • Michael Cooper

    ()

    (Department of Treasury, Office of Tax Analysis)

  • Matthew Knittel

    ()

    (Department of Treasury, Office of Tax Analysis)

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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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 201124.

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Length: 20 pages
Date of creation: 18 May 2011
Date of revision:
Handle: RePEc:rut:rutres:201124
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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 61-86, February.
  6. 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.
  7. Gordon, Roger H. & Hines, James Jr, 2002. "International taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995 Elsevier.
  8. 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.
  9. Alan J. Auerbach, 2006. "Why Have Corporate Tax Revenues Declined? Another Look," NBER Working Papers 12463, National Bureau of Economic Research, Inc.
  10. Alan J. Auerbach & James M. Poterba, 1986. "Why Have Corporate Tax Revenues Declined?," Working papers 435, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. 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.
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