Intertemporal Income Shifting Around a Large Tax Cut: the Case of Depreciations

Laura Dobbins, Sebastian Eichfelder, Frank Hechtner and Jochen Hundsdoerfer ()
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Laura Dobbins: Freie Universität Berlin
Sebastian Eichfelder: Otto-von-Guericke Universität Magdeburg
Frank Hechtner: Freie Universität Berlin
Jochen Hundsdoerfer: Freie Universität Berlin

Schmalenbach Business Review, 2018, vol. 70, issue 4, No 1, 313-340

Abstract: Abstract A corporate tax rate cut provides an incentive for corporations to shift taxable income from years before the tax rate cut to post-reform years. Our study analyzes whether depreciations and write-offs are used to achieve intertemporal income shifting. Using a panel of German manufacturing firms, we test in a difference-in-differences setting whether firms reacted to the announced 2008 corporate tax rate cut of 10 percentage points by accumulating depreciation expenses in the pre-reform year. Our results suggest that depreciation expenses in 2007 are on average about 2.5% higher than in the other observation years. Our analysis also sheds light on heterogeneity in intertemporal income shifting across firms. We provide evidence for a weaker reaction of loss firms resulting from a lower tax incentive. By contrast, we find stronger intertemporal income shifting of large firms and especially firms with a relatively high share of new investments in the capital stock. While the first result is consistent with a higher cost-efficiency of tax planning of large firms, the second finding suggests that investments in the current year provide more discretion for (tax-induced) earnings management.

Keywords: Tax planning; Intertemporal income shifting; Tax avoidance opportunity; Depreciations; Write-offs; H25; M41 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s41464-018-0056-0

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