How Do Firms Respond to Corporate Taxes?

Journal of Accounting Research, Volume 60, Issue 3, 2022

Posted: 11 Oct 2022

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

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Date Written: June 1, 2022

Abstract

Using a novel empirical approach and newly available administrative data on U.S. tax filings, we estimate the corporate elasticity of taxable income, decompose the elasticity into economic responses versus other tax-motivated “accounting” transactions, and determine how responsiveness varies depending on accounting method, firm size, and interest rate. In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, 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 responses to a firm's scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense 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 discounts future cash flows at a lower rate.

Keywords: corporate elasticity of taxable income, private firm behavior, corporate tax, investment, tax reporting

JEL Classification: G32, G30, G38, H25, H21, H26, L25, L33, M40, M41

Suggested Citation

Coles, Jeffrey L. and Patel, Elena and Seegert, Nathan and Smith, Matthew, How Do Firms Respond to Corporate Taxes? (June 1, 2022). Journal of Accounting Research, Volume 60, Issue 3, 2022, Available at SSRN: https://ssrn.com/abstract=4132601

Jeffrey L. Coles (Contact Author)

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

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Matthew Smith

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

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