NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Firms' Responses to Anticipated Reductions in Tax Rates: The Tax Reform Act of 1986

Myron S. Scholes, G. Peter Wilson, Mark A. Wolfson

NBER Working Paper No. 4171
Issued in September 1992
NBER Program(s):   PE

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 margin from the quarter immediately preceding and anticipated decrease in tax rates to the next quarter. We estimate that, on average, the 812 firms in our sample saved approximately five hundred thousand dollars in taxes by deferring sales. At a gross margin rate of one-third, this amounts to nearly twenty billion dollars of shifted sales for our sample firms.

download in pdf format
   (428 K)

download in djvu format
   (284 K)

email paper

This paper is available as PDF (428 K) or DjVu (284 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4171

Published: JAR, Vol. 30 (Supp) (1992): 161-187.

Users who downloaded this paper also downloaded these:
Scholes and Wolfson w3095 The Effects of Changes in Tax Laws on Corporate Reorganization Activity
Feldstein w4496 The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act
Bulow and Scholes Who Owns the Assets in a Defined-Benefit Pension Plan?
Scholes and Wolfson w3094 Employee Stock Ownership Plans and Corporate Restructuring: Myths and Realities
Hausman and Poterba w2120 Household Behavior and the Tax Reform Act of 1986
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us