How Do Firms Respond to Corporate Taxes
82 Pages Posted: 9 May 2018 Last revised: 21 Aug 2021
Date Written: November 17, 2019
Abstract
Using a novel empirical approach and newly available administrative data on US tax
filings, we estimate the corporate elasticity of taxable income, decompose the elasticity
into economic responses versus other tax-motivated ”accounting” adjustments, and
determine how responsiveness varies depending on accounting method, firm size, and
interest rate. In response to a 10 percent increase in the expected marginal tax rate,
private US firms decrease taxable income by 9.1 percent, which indicates a discernibly
more elastic response than prevailing 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 6.1% arising from tax adjustments via (e.g.) revenue and expense
timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash
(9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than
large (8.6%), if the firm discounts future cash flows at a lower rate, and if the firm is
private.
Keywords: Corporate Elasticity of Taxable Income, Private Firm Behavior, Corporate Tax, Investment, Tax Reporting
JEL Classification: M40, M41, G32, G30, G38, H25, H21, H26, L25, L33
Suggested Citation: Suggested Citation