Understanding U.S. Corporate Tax Losses

Abstract

Recent data present a puzzle: the ratio of corporate tax losses to positive income was much higher around 2001 than in earlier recessions. Using a comprehensive 1982-2005 sample of U.S. corporation tax returns, we explore a variety of potential explanations for this surge in tax losses, taking account of the significant use of executive compensation stock options beginning in the 1990s and recent temporary tax provisions that might have had important effects on taxable income.We find that losses rose because the average rate of return of C corporations fell, rather than because of an increase in the dispersion of returns or an increase in the gap between corporate profits subject to tax and NIPA corporate profits. Our analysis also suggests that the increasing importance of S corporations may help explain the recent experience within the C corporate sector, as S corporations have exhibited a different pattern of losses in recent years. However, we can identify no simple explanation for this differing experience. Our investigation concludes with some new puzzles: why did rates of return of C corporations fall so much early in the decade and why has the incidence of losses among C and S corporations diverged?

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

“…treatment depending on the respective firm's industry confirms the analyses by Auerbach and Poterba (1987) and by Altshuler et al (2008).…”

“…Besides concluding on aspects of loss carryforwards and financing, they reveal the concentration of losses in specific industries. The fact that tax loss treatment seems to differ in importance for firms depending on their respective industry has also been outlined in later studies by Cooper and Boynton (2004) 1 and by Altshuler et al (2008). 2 We will elaborate on this variance in our empirical approach.…”

“…It concludes that particularly the housing and the financial industry would benefit from the liquidity effect provided by extending the carryback from 2 to 5 years. Graham and Kim (2009) Altshuler et al (2008) trace the losses of the 2001 recession and distinguish by industries. Papers by Devereux (1989), Aarbu and MacKie-Mason (2003) and Cooper and Knittel (2006) also provide valuable insights that firms seem to structure their investments in a way that they can recover tax losses before they expire.…”

Taxation and the Financial Crisis

“…As it happens, in the USA prior to the 2008 crisis, effective corporate tax rates were rising, largely because tax losses were becoming more frequent (Altshuler et al 2009), 13 implying that non-refundability mattered. The problem, however, is that it arguably was misdirected in so far as the 'nickels in front of a steamroller' strategy is concerned.…”

“…The retroactive loosening of loss limits is misdirected in so far as risk taking incentives going forward are concerned and, considered as fiscal stimulus, may amount to ill-directed 'stimulus for losers', since companies that have been making money derive no benefit from it. 13 The greater frequency of US corporate tax losses in the years before 2008 resulted largely from a decline in average profitability, rather than from greater variance (Altshuler et al 2009). …”