Understanding U.S. Corporate Tax Losses
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?
This paper was presented at the NBER Tax Policy and the Economy Conference, Washington, DC, September 25, 2008. Previous versions were presented at the Forum for Analysis of Corporate Taxation Conference on Assessing the Effects of Corporate Taxation held in Washington, D.C. on March 17, 2008, and in seminars at the Oxford University Centre for Business Taxation Summer Institute, the University of Helsinki, Rutgers University, the Federal Reserve Bank of New York, the University of Oregon, and Monash University. We thank participants, especially Jeff Brown, and many other colleagues as well for helpful comments. Any views or opinions contained in this paper should not be construed as representing the views or policies of the U.S Department of Treasury or any other institution with which the authors are affiliated. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.