Measuring Corporate Tax Preferences

22 Pages Posted: 4 Dec 1998

See all articles by Amy E. Dunbar

Amy E. Dunbar

University of Connecticut - Department of Accounting

Richard C. Sansing

Tuck School of Business at Dartmouth

Date Written: November 1998

Abstract

This paper develops a model of corporate investment in which a certain fraction of the investment is immediately expensed. This model is representative of the treatment of costs associated with internally developed intangible assets, which generally are expensed for both financial reporting and tax purposes. Analysis of the model shows that accounting-based measures of tax preferences are deficient because such measures only detect tax preferences that generate book-tax differences. The paper then proposes a new measure based on stock market returns, which detects tax-favored investments regardless of the financial accounting treatment of the investment. The accounting-based and market-based measures are estimated using data from the 1988-1996 period. Although the accounting-based measure suggests that corporate investments are slightly tax disfavored, the market-based measure suggests that investments in the corporate sector are substantially tax-favored, bearing an explicit tax rate of about 20 percent.

JEL Classification: H25, M41, M44

Suggested Citation

Dunbar, Amy E. and Sansing, Richard C., Measuring Corporate Tax Preferences (November 1998). Available at SSRN: https://ssrn.com/abstract=140094 or http://dx.doi.org/10.2139/ssrn.140094

Amy E. Dunbar

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States
860-486-5138 (Phone)
860-486-4838 (Fax)

Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-0392 (Phone)
603-646-1308 (Fax)

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