Investment incentives and corporate tax asymmetries

Edgerton, Jesse

doi:10.1016/j.jpubeco.2010.08.010

Cited by 167 publications

(123 citation statements)

References 29 publications

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“…In the following section we provide an overview of previous literature dealing with the effects of tax loss treatment and derive empirically study of Edgerton (2009) shows that in the US, existing loss carryforwards limit the benefits of a newly granted bonus depreciation.…”

Section: Introductionmentioning

confidence: 99%

Investment impact of tax loss treatment—empirical insights from a panel of multinationals

Dreßler,

Overesch

2012

Int Tax Public Finance

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10097.pdf Non-Technical SummaryWhile profits are taxed, no immediate tax refund is granted if a corporation suffers losses.Losses can only be used to offset profits generated in other periods or by affiliated companies.The tax loss offset rules, however, significantly differ across countries. While only some countries grant a loss carryback option, a loss carryforward is always possible. Yet, in some countries the intertemporal loss offset is subject to time restrictions. Moreover, several countries have a group taxation which allows consolidation of profits and losses across affiliated firms.This paper analyzes in how far multinational firms factor the differently strict tax loss treatment rules into their investment decisions. We consider two effects of tax loss treatment. Our results suggest that the existence of a group taxation rule in particular exerts a positive influence on investments, which is even stronger for firms with a relatively high probability to suffer losses. Regarding the investment structure, a group taxation regime makes multinational groups distribute their investments across more subsidiaries. Concerning the intertemporal loss offset, we find that investment levels are significantly affected by tax loss offset rules if a subsidiary operates in an industry where the probability to suffer losses is high. Interestingly, a broad time limit until unutilized losses forfeit, however, does not seem to hinder investments.In the second part of our analysis, we trace effects of existing tax loss carryforwards on investment decisions. Our results suggest that the tax rate elasticity of investment actually is significantly reduced if a subsidiary can offset taxable profits with losses carried forward from previous periods. Abstract: We analyze the impact of tax loss treatment on the size and structure of multinational investments. Basically, two effects of tax loss treatment can be expected. First, firms make their investment decisions in the face of potential future losses. Then, the various types of conceivable loss offset provisions affect investment decisions. Secondly, existing loss carryforwards resulting from losses in the past affect the tax rate-elasticity of current investment decisions. The empirical analysis is based on data of German multinationals. The data is taken from the MiDi database provided by the German Central Bank (Deutsche Bundesbank). Re...

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Section: Introductionmentioning

confidence: 99%

Investment impact of tax loss treatment—empirical insights from a panel of multinationals

Dreßler,

Overesch

2012

Int Tax Public Finance

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“…114-118, on German and Austrian corporations. The increasing relevance of loss-making companies in comparison to profitable corporations in the U.S. is addressed in the studies by, e.g., Altshuler et al (2009) and Edgerton (2010), p. 936 f. 5 On the impact of tax regulations on investment incentives see, e.g., already Lintner (1954), Brown (1962), and Sandmo (1974). 6 Gutiérrez et al (2011) provide an overview of loss compensation rules in industrialized nations.…”

Section: Introductionmentioning

confidence: 99%

Asymmetric Taxation of Profits and Losses and its Influence on Investment Timing: Paradoxical Effects of Tax Increases

2012

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in JEL-Classification: H21 · H25Abstract: Applying a time-discrete investment model and a setting with an entry and an exit option and cash flow uncertainty we present a dynamic analysis of the impact of various loss offset regimes on risky investment timing decisions. We find that a tax system with loss offset restrictions will not distort timing decisions if the investor can exit the project. By contrast, in a setting without exit flexibility a tax discrimination against losses can cause paradoxical effects. In that respect, we analytically identify conditions for higher taxes to increase investors' propensity to choose early investment and hence accelerate entrepreneurial investment.

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“…The higher effect for loss carrybacks reflects that these rules provide 2 For the period 1993-2004, 45-52 percent of U.S. corporations reported total net operating losses valued at over $2.9 trillion (Cooper and Knittel, 2010). In 2002 alone, U.S. firms reported over $418 billion in losses on their tax returns, equivalent to more than 50 percent of the $676 billion of income reported by profitable firms (Edgerton, 2010). 3 Domar and Musgrave (1944) first explored the second effect in a model of individual portfolio choice.…”

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confidence: 99%

“…For example, Devereux, Keen, and Schiantarelli (1994) find that tax asymmetries do not improve the performance of tax-adjusted Q equations in predicting the level of investment. Edgerton (2010) studies how the asymmetric tax treatment of profits and losses affects the size of firm investment. He finds that such asymmetries made bonus depreciation tax incentives at most four percent less effective than if all firms had been taxable.…”

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confidence: 99%

Taxation and Corporate Risk-Taking

Langenmayr

Lester²

2014

SSRN Journal

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We study whether the corporate tax system provides incentives for risky firm investment. We first model the effects of corporate tax rates and tax loss offset rules on firm risk-taking. Testing the theoretical predictions, we find that firm risk-taking is positively related to the length of tax loss periods. This result occurs because the loss rules shift a portion of investment risk to the government, inducing firms to increase their overall level of risk-taking. Moreover, the corporate tax rate has a positive effect on risk-taking for firms that can expect to use their tax losses, and a negative effect for those that cannot. Thus, the effect of taxes on risky investment decisions varies among firms, and its sign hinges on firm-specific expectations of future tax loss recovery.

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Investment incentives and corporate tax asymmetries

Cited by 167 publications

References 29 publications

Investment impact of tax loss treatment—empirical insights from a panel of multinationals

Investment impact of tax loss treatment—empirical insights from a panel of multinationals

Asymmetric Taxation of Profits and Losses and its Influence on Investment Timing: Paradoxical Effects of Tax Increases

Taxation and Corporate Risk-Taking

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