How Do Firms Respond to Corporate Taxes

76 Pages Posted: 9 May 2018 Last revised: 17 Oct 2020

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 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

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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