NBER Working Papers by G. Peter Wilson

The 1986 Tax Act in the U.S. gradually reduced corporate tax rates from 46 percent prior to the Act to 34 percent by the middle of 1988. This reduction gave firms an incentive, in 1986 and 1987, to shift taxable income to future years when tax rates would be lower. There are substantial impediments, however, to shifting taxable income across periods (notably, offsetting tax consequences to other contracting parties and a host of nontax costs), and it becomes an empirical question as to whether the benefits of shifting taxable income are sufficient to overcome the impediments. This paper examines whether firms deferred income recognition and/or accelerated expense recognition in anticipation of these declining tax rates. We find statistically significant evidence that firms shifted gross ma...