Deferred Tax Positions and Incentives for Corporate Behavior Around Corporate Tax Changes

Abstract

A firm's deferred tax position can affect its incentives to lobby for or against tax reform, as well as how the firm is affected by a transition from one tax regime to another. We compile disaggregated deferred tax position data for a sample of large U.S. firms between 1993 and 2004 to analyze the incentives created by these positions and to explore how these positions might affect firm behavior before and after a pre-announced tax rate change. We find substantial heterogeneity in the size and sign of deferred tax positions. While half of our sample firms report a deferred tax position of less than three percent of assets, approximately ten percent report a position in excess of ten percent of assets. Although one might expect firms to defer the reporting of income when there is a pre-announced reduction in the corporate tax rate, we find that approximately one third of the firms in our sample would have an incentive to accelerate income in such a setting because doing so would maximize the value of their net operating loss carryforwards. We estimate that if the federal statutory corporate tax rate had been reduced from 35 to 30 percent in 2004, the resulting revaluation of deferred tax assets would have increased net income in that year by an average of 16.5 percent for firms with a net deferred tax liability, while reducing net income by an average of 11.4 percent for those firms with a net deferred tax asset. Our results suggest that the heterogeneous deferred tax positions of large U.S. corporations create substantial variation in the short-run effect of changes in corporate tax rates on reported earnings. Recognizing these divergent incentives is important for understanding the political economy of corporate tax reform.