Corporate Tax Preferences: Identification and Accounting Measurement
32 Pages Posted: 6 Nov 2010 Last revised: 17 Apr 2013
There are 2 versions of this paper
The Net Present Value Effective Tax Rate
Date Written: February 17, 2013
Abstract
This study evaluates the relation between a firm’s long-run cash effective tax rate (ETR) and the extent to which a corporation’s projects are tax-favored or tax-disfavored. We first derive a measure of the extent to which a project is tax-favored that is independent of the project’s financial accounting treatment. We argue that our measure, which focuses on the present value of the government’s tax collections from the project, is superior to the traditional measure that compares the pretax and after-tax internal rates of return of the project. We then use our measure as a benchmark with which to examine the relation between the ETR and tax preferences. We find that the long-run cash ETR is an unreliable tax preference measure, even when the asset is depreciated for financial reporting purposes at the rate at which its productivity declines.
Keywords: Effective Tax Rate, Tax Preferences
JEL Classification: H25
Suggested Citation: Suggested Citation
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