How Do Firms Respond to Corporate Taxes
76 Pages Posted: 9 May 2018 Last revised: 17 Oct 2020
Date Written: November 17, 2019
Using a novel empirical approach and newly available administrative data on US tax filings, we estimate the corporate elasticity of taxable income and determine how such tax 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 6.0 percent arising from tax adjustments via (e.g.) revenue and cost 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%), and if the firm has relatively high-cost access to capital.
Keywords: Private Firm Behavior, Corporate Tax, Investment, Tax Reporting
JEL Classification: H22, H21, H25, H32, G38
Suggested Citation: Suggested Citation