How Do Firms Respond to Corporate Taxes
70 Pages Posted: 9 May 2018 Last revised: 20 Nov 2019
Date Written: November 17, 2019
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: Suggested Citation