On the Relation of Deferred Taxes and Tax Cash Flow

Abstract

Using panel data over 16 years of observations, this study investigates whether deferred tax information serves its main purpose – informing about future tax cash flow. The results show that deferred taxes in fact have short-term cash flow implications. Yet, the estimated magnitude of these implied cash flows is rather small. While the model explains 86.53 percent of the variation in cash taxes paid, inclusion of deferred tax information adds only negligible 0.14 percent in explanatory power. Furthermore, deferred tax coefficients are insignificant for explaining future tax cash flow for 67.25 percent of the sample firms. Consistently, MAPE, RMSE, and differences in forecast errors suggest that the model excluding deferred tax information outperforms the model including deferred tax information in terms of average forecasting accuracy. Overall, the economic significance of deferred tax cash flow seems to be vary small.