Tax Asymmetries and Corporate Income Tax Reform / Saman Majd, Stewart C. Myers.

Format:

Book

Author/Creator:

Majd, Saman.

Contributor:

National Bureau of Economic Research.

Myers, Stewart C.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1924.

NBER working paper series no. w1924

Language:

English

Subjects (All):

Corporations--Taxation--Mathematical models.

Corporations.

Income tax.

Taxation--Rates and tables.

Taxation.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1986.

Cambridge, MA : National Bureau of Economic Research, 1986.

Summary:

This paper investigates the impact of tax asymmetries (the lack of full loss offsets) under current corporate income tax law and a stylized tax reform proposal. The government's tax claim on the firm's pretax cash flows is modelled as a series of path-dependent call options and valued by option pricing procedures and Monte Carlo simulation.The tax reform investigated reduces the statutory tax rate, eliminates the investment tax credit and sets tax depreciation approximately equal to economic depreciation. These changes would increase the effective tax rate on marginal investments by firms that always pay taxes, but dramatically reduce the potential burden of tax asymmetries. "Stand-alone" investments, which are exposed to the greatest burden, are uniformly more valuable under this reform, despite the loss of the investment tax credit and accelerated depreciation.These general results are backed up by a series of numerical experiments. We vary investment risk, inflation (with and without indexing of tax depreciation), and investigate how allowing interest on loss carry forwards would affect after-tax project value.

Notes:

Print version record

May 1986.