The Effects of the Length of the Tax-Loss Carryback Period on Tax Receipts and Corporate Marginal Tax Rates
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 five years, as recently proposed in President Obama's budget blueprint, would provide $19 ($34) billion of additional liquidity to the corporate sector for 2008 (2009). Our calculations imply that the benefits of the extended Carryback period would be concentrated in the homebuilding, automobile, and financial industries. Extending the carryback period would increase the marginal tax rate of loss firms 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 breakproposed by the Obama administration would have a significant liquidity effect on corporations suffering large losses in recent years. If the tax proposal were extended to include TARP firms, the liquidity effect would triple in size.
Why Don ’ t Firms Claim their Tax Refunds ? Evidence from Private Debt Contracts
A puzzle is why a large proportion of firms eligible for income tax refunds do not file claims for such refunds on a timely basis. I hypothesize that firms with private information about higher future profitability and seeking debt financing forgo immediate use of provisions that allow the carryback of net operating losses as a signaling device to separate from firms with lower future profitability in order to obtain more favorable borrowing terms. Firms expecting lower profitability are deterred from mimicking because carrying net operating losses forward is less valuable to them. Consistent with this hypothesis, firms that do not file claims for refunds on a timely basis display higher future profitability and receive lower debt financing costs than firms that file when they first become eligible. These results are stronger when the level of information asymmetry about the borrower’s type is greater. This study is the first to offer a rational explanation for the low take-up rate of tax refunds. As a result, the evidence presented in this study could be relevant to academics and fiscal policy makers that seek to better understand how tax policies affect real decisions. This Draft: February 2016
The Law of Failure
If a broker-dealer liquidates in federal bankruptcy court, why does an insurance company liquidate in state court, and a bank outside of court altogether? Why do some businesses re-organize under state law 'assignments', rather than the more well-known Chapter 11 of the Bankruptcy Code? Why do some laws use the language of bankruptcy but without advancing policy goals of the Bankruptcy Code? In this illuminating work, Stephen J. Lubben tackles these questions and many others related to the collective law of business insolvency in the United States. In the first book of its kind, Lubben notes the broad similarities between the many insolvency systems in the United States while describing the fundamental differences lurking therein. By considering the whole sweep of these laws - running the gamut from Chapter 11 to obscure receivership provisions of the National Bank Act - readers will acquire a fundamental understanding of the 'law of failure'.