Investor Perceptions of the Book Minimum Tax

50 Pages Posted: 28 Sep 2022 Last revised: 6 Feb 2024

See all articles by Fabio B. Gaertner

Fabio B. Gaertner

University of Wisconsin - Madison - Department of Accounting and Information Systems

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area

Stacie Kelley Laplante

University of Wisconsin - Madison

Max Pflitsch

Technische Universität München (TUM)

Date Written: February 2, 2024

Abstract

The Inflation Reduction Act establishes a new 15 percent corporate minimum tax on the adjusted financial accounting income for large U.S. corporations. While the minimum tax is estimated to raise $222 billion over 10 years, some fear firms will manipulate their accounting earnings to reduce their tax liabilities, resulting in less revenue raised. Using an event study, we examine the extent to which investors believe this tax will reduce firm value. We examine stock market reactions around key legislative developments leading to the enactment of the book minimum tax. Our findings show targeted firms experience significantly lower stock returns than non-targeted firms during the enactment process (about 1.4 to 1.8 percent of firm value). In aggregate, our findings are consistent with the Joint Committee on Taxation’s revenue estimates. In cross-sectional tests, we fail to find evidence that firms most likely to avoid the tax via earnings management experience more positive returns. We also fail to find less negative returns for firms most likely to pass on the tax to consumers. Overall, our results suggest investors do not expect firms to avoid this tax. Instead, they appear to expect a significant portion of the corporate minimum tax to be remitted by firms and borne by shareholders.

Keywords: book minimum tax, book-tax conformity, Inflation Reduction Act

JEL Classification: H20, H25, M41

Suggested Citation

Gaertner, Fabio B. and Hoopes, Jeffrey L. and Laplante, Stacie Kelley and Pflitsch, Max, Investor Perceptions of the Book Minimum Tax (February 2, 2024). Available at SSRN: https://ssrn.com/abstract=4225049 or http://dx.doi.org/10.2139/ssrn.4225049

Fabio B. Gaertner (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Stacie Kelley Laplante

University of Wisconsin - Madison ( email )

975 University Avenue
Madison, WI 53706
United States
608-265-3494 (Phone)
608-265-3494 (Fax)

Max Pflitsch

Technische Universität München (TUM) ( email )

Germany

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