Tax Asymmetries and Corporate Income Tax Reform

54 Pages Posted: 2 Sep 2000 Last revised: 18 May 2001

See all articles by Saman Majd

Saman Majd

University of Pennsylvania Wharton School

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Date Written: May 1986

Abstract

This paper investigates the impact of tax asymmetries (the lack of full loss offsets) under current corporate income tax law and a stylized tax reform proposal. The government's tax claim on the firm's pretax cash flows is modelled as a series of path-dependent call options and valued by option pricing procedures and Monte Carlo simulation.The tax reform investigated reduces the statutory tax rate, eliminates the investment tax credit and sets tax depreciation approximately equal to economic depreciation. These changes would increase the effective tax rate on marginal investments by firms that always pay taxes, but dramatically reduce the potential burden of tax asymmetries. "Stand-alone" investments, which are exposed to the greatest burden, are uniformly more valuable under this reform, despite the loss of the investment tax credit and accelerated depreciation.These general results are backed up by a series of numerical experiments. We vary investment risk, inflation (with and without indexing of tax depreciation), and investigate how allowing interest on loss carry forwards would affect after-tax project value.

Suggested Citation

Majd, Saman and Myers, Stewart C., Tax Asymmetries and Corporate Income Tax Reform (May 1986). NBER Working Paper No. w1924. Available at SSRN: https://ssrn.com/abstract=240856

Saman Majd

University of Pennsylvania Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Stewart C. Myers (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
Cambridge, MA 02142
United States
617-253-6696 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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