Firms' Responses to Anticipated Reductions in Tax Rates: The Tax Reform Act of 1986

49 Pages Posted: 31 May 2011 Last revised: 29 Nov 2022

See all articles by Myron S. Scholes

Myron S. Scholes

Stanford Graduate School of Business; Platinum Grove Asset Management L.P.; Oak Hill Platinum Partners, LLC

G. Peter Wilson

affiliation not provided to SSRN

Mark A. Wolfson

Stanford Graduate School of Business

Date Written: September 1992

Abstract

The 1986 Tax Act in the U.S. gradually reduced corporate tax rates from 46 percent prior to the Act to 34 percent by the middle of 1988. This reduction gave firms an incentive, in 1986 and 1987, to shift taxable income to future years when tax rates would be lower. There are substantial impediments, however, to shifting taxable income across periods (notably, offsetting tax consequences to other contracting parties and a host of nontax costs), and it becomes an empirical question as to whether the benefits of shifting taxable income are sufficient to overcome the impediments. This paper examines whether firms deferred income recognition and/or accelerated expense recognition in anticipation of these declining tax rates. We find statistically significant evidence that firms shifted gross margin from the quarter immediately preceding and anticipated decrease in tax rates to the next quarter. We estimate that, on average, the 812 firms in our sample saved approximately five hundred thousand dollars in taxes by deferring sales. At a gross margin rate of one-third, this amounts to nearly twenty billion dollars of shifted sales for our sample firms.

Suggested Citation

Scholes, Myron S. and Scholes, Myron S. and Wilson, G. Peter and Wolfson, Mark A., Firms' Responses to Anticipated Reductions in Tax Rates: The Tax Reform Act of 1986 (September 1992). NBER Working Paper No. w4171, Available at SSRN: https://ssrn.com/abstract=1854203

Myron S. Scholes (Contact Author)

Stanford Graduate School of Business ( email )

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Platinum Grove Asset Management L.P. ( email )

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Oak Hill Platinum Partners, LLC ( email )

1100 King Street, Building 4
Rye Brook, NY 10573
United States

G. Peter Wilson

affiliation not provided to SSRN

No Address Available

Mark A. Wolfson

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650) 723-0311 (Phone)
(650) 723-4010 (Fax)

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