Firms' Responses to Anticipated Reductions in Tax Rates: The Tax Reform Act of 1986 / Myron S. Scholes, G. Peter Wilson, Mark A. Wolfson.

Format:

Book

Author/Creator:

Scholes, Myron S.

Contributor:

National Bureau of Economic Research.

Wilson, G. Peter.

Wolfson, Mark A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4171.

NBER working paper series no. w4171

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Firms' Responses to Anticipated Reductions in Tax Rates

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1992.

Summary:

The 1986 Tax Act in the U.S. gradually reduced corporate tax rates from 46 percent prior to the Act to 34 percent by the middle of 1988. This reduction gave firms an incentive, in 1986 and 1987, to shift taxable income to future years when tax rates would be lower. There are substantial impediments, however, to shifting taxable income across periods (notably, offsetting tax consequences to other contracting parties and a host of nontax costs), and it becomes an empirical question as to whether the benefits of shifting taxable income are sufficient to overcome the impediments. This paper examines whether firms deferred income recognition and/or accelerated expense recognition in anticipation of these declining tax rates. We find statistically significant evidence that firms shifted gross margin from the quarter immediately preceding and anticipated decrease in tax rates to the next quarter. We estimate that, on average, the 812 firms in our sample saved approximately five hundred thousand dollars in taxes by deferring sales. At a gross margin rate of one-third, this amounts to nearly twenty billion dollars of shifted sales for our sample firms.

Notes:

Print version record

September 1992.