Corporate Taxes, Tax Incidence, and Pretax Returns: Causes and Measurement

14 Pages Posted: 22 Jan 2021 Last revised: 27 May 2021

See all articles by David A. Guenther

David A. Guenther

University of Oregon - Department of Accounting

Richard C. Sansing

Tuck School of Business at Dartmouth

Date Written: February 5, 2021

Abstract

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

Guenther, David A. and Sansing, Richard C., Corporate Taxes, Tax Incidence, and Pretax Returns: Causes and Measurement (February 5, 2021). Tuck School of Business Working Paper No. 3729546, Available at SSRN: https://ssrn.com/abstract=3729546 or http://dx.doi.org/10.2139/ssrn.3729546

David A. Guenther

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5384 (Phone)

Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-0392 (Phone)
603-646-1308 (Fax)

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