Essays on taxation and firm behavior

Abstract

This dissertation consists of three essays that examine the impact of tax policy of firm behavior. The first chapter uses new well-level production data on California oil wells and after-tax producer prices to estimate how temporary taxes affect oil production decisions. Theory suggests that temporary taxes could lead producers to shut wells, and more generally that they create strong incentives for retiming extraction of the exhaustible resource to minimize tax burdens. The empirical estimates suggest small estimates of extensive responses to after-tax prices, meaning that wells are rarely shut, but they also suggest substantial retiming of production for operating wells. While the estimates vary with specifications, the elasticity of oil production with respect to the after-tax price is estimated to fall between 0.208 and 0.261. The estimates are used to calibrate a simple model of the efficiency cost of tax-induced distortions relative to the no-tax optimal extraction path. Calculations suggest that a 15 percent temporary excise tax on California oil producers reduces the present value of producer surplus by between one and five percent of the no-tax surplus or between 113 and 166 percent of the government revenue raised, depending on the original life of the well and the duration of the temporary tax. The second chapter examines the impact of the federal R&D tax credit on research spending during the 1981-1991 period using both publicly available data from 10-Ks and confidential data from federal corporate tax returns. The key advance on previous work is the use of an instrumental variables strategy based on tax law changes that addresses the potential simultaneity between R&D spending and its user cost. The results yield a range of estimates for the effect of tax incentives on R&D investment. Estimates using only publicly available data suggest that a ten percent tax subsidy for R&D yields on average between $3.5 (0.24) million and $10.7 (1.79) million in new R&D spending per firm. Estimates from IRS SOI data suggest that a ten percent reduction in the user cost would lead the average firm to increase qualified spending by $2.0 (0.39) million. Estimates from the much smaller merged sample suggest that qualified spending is responsive to the tax subsidy. A similar response in total spending is not statistically discernible in the merged sample. The inconsistency of estimates across datasets, instrument choice and specifications highlights the sensitivity of estimates of the tax-price elasticity of R&D spending. How a corporate tax reform will affect a firms reported earnings in the year of its enactment, and how the firm may choose to react to the tax reform, depend in part on the sign and magnitude of the firms net deferred tax position. The final chapter, written jointly with Jim Poterba and Jeri Seidman, compiles new disaggregated deferred tax position data for a sample of large U.S. firms between 1993 and 2004. These data are used to assess the size and composition of deferred tax assets and liabilities and their magnitudes relative to the book-tax income gap. We find that temporary differences account for a substantial share of the book-tax income gap. The key contributors to the increase in the book-tax gap include mark-to-market adjustments, property and valuation allowances. In interpreting the data we collect on deferred tax assets and liabilities in the context of the behavioral incentives surrounding a tax rate change, we find that a pre-announced reduction in the corporate tax rate would give a third of the firms in our sample to a strong incentive to accelerate income to the high-tax period, contrary to typical expectations that fail to take deferred tax positions into account.