Corporate Tax Preferences: Identification and Accounting Measurement

32 Pages Posted: 6 Nov 2010 Last revised: 17 Apr 2013

See all articles by Jim Musumeci

Jim Musumeci

Southern Illinois University - Department of Finance

Richard C. Sansing

Tuck School of Business at Dartmouth

Multiple version iconThere are 2 versions of this paper

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

Musumeci, Jim and Sansing, Richard C., Corporate Tax Preferences: Identification and Accounting Measurement (February 17, 2013). Tuck School of Business Working Paper No. 2010-84, Available at SSRN: https://ssrn.com/abstract=1703494 or http://dx.doi.org/10.2139/ssrn.1703494

Jim Musumeci

Southern Illinois University - Department of Finance ( email )

Mailcode 4626
Carbondale, IL 62901-4626
United States

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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