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Tax loss carrybacks
(2016)
Tax regimes treat losses and profits asymmetrically when profits are immediately taxed but losses are not immediately refunded. We find that treating losses less asymmetrically by granting refunds less restrictively increases loss firms' investment: A third of the refund is invested and the rest is held as cash or returned to shareholders. However, the investment response is driven primarily by firms prone to engage in risky overinvestment. Consistent with the risk of misallocation, we find a delayed exit of low-productivity loss firms receiving less restrictive refunds, indicating potential distortion of the competitive selection of firms. This distortion also negatively affects aggregate output and productivity. Our results suggest that stimulating loss firms' investment with refunds unconditional on their future prospects comes at the risk of misallocation.
This study examines heterogeneity in tax rate elasticities of corporate capital using staggered variation in local business tax rates of German municipalities. The results suggest an average long-run capital decline of 0.97% after a 1% increase in the tax rate. In line with prior literature that suggests higher investment-cash flow sensitivities of firms with financing constraints tax rate elasticities are up to half times larger for financially constrained firms than for unconstrained firms. Moreover, capital responses are about half times larger for firms with fewer tax avoidance possibilities. Finally, this study contributes to the literature on tax incidence. I find a weaker relation between taxes and capital for firms that are less likely to bear the economic burden of the tax because they shift the tax incidence to their stakeholders.