How Do Firms Respond to Corporate Taxes

82 Pages Posted: 9 May 2018 Last revised: 21 Aug 2021

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 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

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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