Measuring Corporate Tax Preferences
22 Pages Posted: 4 Dec 1998
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: Suggested Citation
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