Corporate Taxes, Tax Incidence, and Pretax Returns: Causes and Measurement
14 Pages Posted: 22 Jan 2021 Last revised: 27 May 2021
Date Written: February 5, 2021
We develop a model to investigate the relations among (1) corporate tax incidence, (2) tax capitalization, and (3) implicit corporate tax in a competitive equilibrium. The economic pretax return is independent of whether the incidence of the corporate tax is shifted from shareholders to non-shareholders, such as customers or workers. However, tax incidence does affect the pretax accounting return, because the denominator of the return measure reflects the historical cost of the firms' assets and is often measured using prior year book values. To the extent a tax rate change changes the fair values of corporate assets (i.e., tax capitalization), the corporate tax affects pretax economic returns but not pretax accounting returns. The implicit tax rate for corporations reflects differences in corporate tax rates but is independent of pretax accounting returns.
Keywords: Tax Incidence, Tax Capitalization, Implicit Tax, Corporate Tax
JEL Classification: H22, H25, M41
Suggested Citation: Suggested Citation