The Implications of Tax Asymmetry for U.S. Corporations

Abstract

This paper examines the implications of the asymmetric treatment of tax losses for U.S. corporations for 1993-2004. We fi nd that partial refunding of tax losses reduces their real values by approximately one-half and produces modest effective tax rate differentials between taxable and non-taxable fi rms. However, if fi rms use debt financing or utilize an investment tax credit, then rate differentials can be signifi cant. We also fi nd that certain industries and younger fi rms disproportionately bear the negative consequences of partial refunding, due to either delayed realization or the inability to use tax losses to offset prior or future profi ts.

Made in the U.S.A.? A Study of Firm Responses to Domestic Production Incentives

“…The literature shows that many firms have an NOL carryforward at some point in a firm's life cycle (Cooper and Knittel []; Edgerton []), and recent work documents that almost 90% of the largest public companies report an NOL in at least one jurisdiction (Heitzman and Lester []). Thus, the existence and use of a loss carryforward should not imply that the DPAD firms and control firms inherently differ.…”

Financial development and tax revenues in Turkey: A non-linear cointegration analysis

“…Corporations will have tax liabilities if they return profit, but generally they are not paid an equivalent refund when they experience a tax loss (Cooper & Knittel, 2010). While corporations can reduce future tax liabilities on the basis of prior losses, individual tax payers are not allowed to reduce their future tax liabilities based on their personal financial losses.…”

Loss carryover provisions

“…While this result remains a puzzle, the authors speculate that it may be driven by omitted variables and measurement error, or the practice of leasing and renting of assets across firms. Cooper and Knittel (2010) use tax return data from the years 1993 to 2004 to examine the implications of an asymmetric treatment of gains and losses for US firms. Overall, they find modest effective tax rate differentials between taxable and non-taxable firms; however, use of debt finance or investment tax credits leads to substantially higher differentials, implying that the adverse effects of imperfect loss offsets are concentrated among specific sectors and firms.…”

“…Fourth, some countries have additional restrictions regarding tax losses acquired through mergers and acquisitions. Cooper and Knittel (2010) provide an empirical estimate of the magnitude of these effects. Using an unbalanced panel of tax returns they estimate that only around one half of the real value of tax losses could be recouped by US firms during the period 1993 to 2004.…”