July 27, 2011
Corporate Tax Reform, Deferred Taxes, and the Effect on Book ProfitsJana Smith Raedy (University of North Carolina), Jeri K. Seidman (University of Texas) & Douglas A. Shackelford (University of North Carolina) have posted Corporate Tax Reform, Deferred Taxes, and the Immediate Effect on Book Profits on SSRN. Here is the abstract:
This paper analyzes the impact of GAAP-mandated adjustments to deferred tax accounts when corporate income tax rates change. Using hand-collected data from the tax footnotes of the Fortune 50, we estimate that a reduction in the corporate tax rate from 35% to 30% would substantially affect the accounting earnings, capital, and effective tax rate of many companies. For the 18 publicly-traded Fortune 50 companies with a net deferred tax asset position, the total drop in accounting earnings would be $12 billion, with the banking industry experiencing some of the largest earnings decreases. For the 31 publicly-traded Fortune 50 companies with a net deferred tax liability position, the total jump in accounting earnings would be $28 billion, with the energy industry enjoying many of the largest increases. Although these large, one-time adjustments to the deferred tax accounts do not affect cash taxes paid, users of the financial statements should be aware that the deferred tax accounts may be significantly altered if and when tax rates change and that these effects will be reflected in net income.
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