How Do Firms Respond to Corporate Taxes

70 Pages Posted: 9 May 2018 Last revised: 20 Nov 2019

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance

Elena Patel

University of Utah - Department of Finance

Nathan Seegert

University of Utah - Department of Finance

Matthew Smith

Government of the United States of America - US Department of Treasury

Date Written: November 17, 2019

Abstract

Using a novel empirical approach, a large, newly available administrative dataset on US corporate tax filings, and a structural model, we estimate the corporate elasticity of taxable income in the corporate income tax rate for US firms. In response to a 10.1 percent increase in the expected marginal tax rate, US firms decrease taxable income by 8.9 percent, which indicates a discernibly more elastic response than the prevailing published elasticity estimates. This response reflects a decrease in taxable income of 3.0% arising from real economic adjustments to a firm's scale of operations and 6.0% arising from earnings management. While cash reporting firms are more responsive than accrual accounting firms, and this response is disproportionately driven by earnings management regardless of accounting method. Our estimates suggest that lowering the corporate tax rate from 35% to 25% would increase firm value by 16%.

Keywords: Private Firm Behavior, Corporate Tax, Investment, Tax Reporting

JEL Classification: H22, H21, H25, H32, G38

Suggested Citation

Coles, Jeffrey L. and Patel, Elena and Seegert, Nathan and Smith, Matthew, How Do Firms Respond to Corporate Taxes (November 17, 2019). Available at SSRN: https://ssrn.com/abstract=3167369 or http://dx.doi.org/10.2139/ssrn.3167369

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Elena Patel

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Nathan Seegert (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Matthew Smith

Government of the United States of America - US Department of Treasury ( email )

Washington, DC 20551
United States

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