The Effects of the Length of the Tax-Loss Carryback Period on Tax Receipts and Corporate Marginal Ta

The Effects of the Length of the Tax-Loss Carryback Period on Tax Receipts and Corporate Marginal Ta

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Unformatted text preview: The Effects of the Length of the Tax-Loss Carryback Period 413 National Tax Journal Vol. LXIl, No. 3 September 2009 Abstract - We investigate how the length of the net operating loss carryback period affects corporate liquidity and marginal tax rates. We estimate that extending the carryback period from two to fi ve years, as recently proposed in President Obamas budget blueprint, would provide $19 ($34) billion of additional liquidity to the corpo- rate sector for 2008 (2009). Our calculations imply that the benefi ts of the extended carryback period would be concentrated in the homebuilding, automobile, and fi nancial industries. Extending the carryback period would increase the marginal tax rate of loss fi rms by more than 200 basis points on average, which all else equal would lead corporations to use an additional $8 ($10) billion of debt and reduce tax payments by another $1.2 ($1.5) billion in 2008 (2009). Overall, the tax break proposed by the Obama administration would have a signifi cant liquidity effect on corporations suffering large losses in recent years. If the tax proposal were extended to include TARP fi rms, the liquidity effect would triple in size. INTRODUCTION I n January 2009, then-President-elect Barack Obama and congressional Democrats proposed a $300 billion tax cut package. One proposal was to increase the length of the net operating loss (NOL) carryback period from two years to fi ve years for losses realized in 2008 and 2009. The loss carryback feature of the tax code allows corporations to obtain a refund today for taxes paid in the recent past. For example, with a fi ve-year carryback period, losses experienced in 2008 could be carried back and used to offset positive income earned dur- ing the period 20032007, and tax payments associated with this offset income would be refunded in 2008. The proposed increase in the carryback period would be particularly helpful for the corporate sector given that many U.S. corporations paid record-level income taxes during the economic boom from 20032007 but are not expected to be profi table in 2008 and 2009. The initial proposal was anticipated to apply to businesses of all sizes. However, the fi nal stimulus package (called the American Recovery and Reinvestment Tax Act of 2009) restricts the extension of the carryback period to businesses with revenues under $15 million a year. Moreover, the bill The Effects of the Length of the Tax-Loss Carryback Period on Tax Receipts and Corporate Marginal Tax Rates John R. Graham Fuqua School of Business, Duke University, Durham, NC 27708-0120 Hyunseob Kim Fuqua School of Business, Duke University, Durham, NC 27708-0120 NATIONAL TAX JOURNAL 414 allows those small businesses to carry back losses that occurred in tax years beginning or ending in calendar year 2008 only, instead of both 2008 and 2009....
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This note was uploaded on 04/05/2011 for the course ACC 310 taught by Professor Drogt during the Fall '10 term at Grand Valley State University.

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The Effects of the Length of the Tax-Loss Carryback Period on Tax Receipts and Corporate Marginal Ta

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