Intertemporal Income Shifting Around a Large Tax Cut: the Case of Depreciations

Abstract

A corporate tax rate cut provides an incentive for corporations to shift taxable income from years before the tax rate cut to post-reform years. Our study analyzes whether depreciations and writeoffs are used to achieve intertemporal income shifting. Using a panel of German manufacturing firms, we test in a difference-indifferences setting whether firms reacted to the announced 2008 corporate tax rate cut of 10 percentage points by accumulating depreciation expenses in the prereform year. Our results suggest that depreciation expenses in 2007 are on average about 2.5% higher than in the other observation years. Our analysis also sheds light on heterogeneity in intertemporal income shifting across firms. We provide evidence for a weaker reaction of loss firms resulting from a lower tax incentive. By contrast, we find stronger intertemporal income shifting of large firms and especially firms with a relatively high share of new investments in the capital stock. While the first result is consistent with a higher cost-efficiency of tax planning of large firms, the second finding suggests that investments in the current year provide more discretion for (tax-induced) earnings management.

Tax-Induced Earnings Management and Book-tax Conformity: International Evidence from Unconsolidated Accounts.

“…Alternatively, Guenther (1994) examines shifting of accruals, and Maydew (1997) analyzes shifting of non-recurring versus recurring revenues and expenses for firms with net operating losses. Roubi and Richardson (1998), and Dobbins et al (2018) provide evidence for such intertemporal income shifting related to changes in statutory and marginal tax rates in other countries (Canada, Germany, Malaysia, and Singapore).…”

Tax-Induced Earnings Management and Book-Tax Conformity: International Evidence from Unconsolidated Accounts

“…Alternatively, Guenther (1994) examines shifting of accruals, and Maydew (1997) analyzes shifting of non-recurring versus recurring revenues and expenses for firms with net operating losses. Roubi andRichardson (1998), andDobbins et al (2018) provide evidence for such intertemporal income shifting related to changes in statutory and marginal tax rates in other countries (Canada, Germany, Malaysia, and Singapore).…”

“…In particular, prior literature documents conforming strategies that shift transactions across periods surrounding particular tax law changes (Scholes, Wilson, and Wolfson 1992;Guenther 1994;Maydew 1997;Roubi and Richardson 1998;Dobbins et al 2018). A related stream of research alternatively examines the role of financial and tax reporting incentive trade-offs with specific transactions: public or private operation decisions (Penno and Simon 1986), option dispositions (Matsunaga, Shevlin, and Shores 1992), aggressive tax positions (Cloyd, Pratt, and Stock 1996), divestitures (Klassen 1997), and option grants (Klassen and Mawani 2000).…”

How Do Italian Private Companies Respond to a Reduction in the Corporate Standard Tax Rate? A Focus on the Ownership Gender Diversity Effect

“…Previous studies have amply documented that cuts in the corporate standard tax rate encourage companies to practice earnings management by shifting profits from the fiscal year in which it is higher to the fiscal year in which it is lower in order to save on taxes (e.g. Scholes et al, 1992;Klassen et al, 1993;Guenther, 1994;Maydew, 1997;Lopez et al, 1998;Roubi & Richardson, 1998;Lin et al, 2012;Watrin et al, 2012;Lin et al, 2014;Sundvik, 2016;Höglund & Sundvik, 2016;Sundvik, 2017a;Sundvik, 2017b;Sundvik, 2017c;Dobbins International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No.…”

“…9, No. 4 Maydew, 1997;Lopez et al, 1998;Roubi & Richardson, 1998;Lin et al, 2012;Watrin et al, 2012;Lin et al, 2014;Mattei, 2014a;Mattei, 2014b;Sundvik, 2016;Höglund & Sundvik, 2016;Sundvik, 2017a;Sundvik, 2017b;Sundvik, 2017c;Dobbins et al, 2018;Haga et al, 2019). In a recent review of the literature, Sundvik (2017a) found that this phenomenon has been underexplored in private companies, despite their importance in many countries around the world.…”