An Empirical Estimate of Corporate Tax Refundability and Effective Tax Rates

TLDR: In this paper, the authors quantify the impact of imperfect loss offsetting or refundability on industry effective tax rate measurements and use the refundability measures to estimate effective tax rates on Canadian firms by industry.

Abstract: The provisions of generous tax incentives during the 1970s and the recession of the early 1980s led to a marked increase in the number of nontaxable corporations in Canada. During the 1977 to 1982 period, over 40 percent of investment was done by corporations that were rarely taxable; 30 percent by corporations that were normally taxable; and the balance undertaken by corporations that were taxable about half the time.1 The degree to which taxable losses can be used to shelter other forms of taxable income has important implications with regard to the study of effective tax rates on capital income. This paper attempts to quantify the impact of imperfect loss offsetting or refundability on industry effective tax rate measurements. Section II of this note provides an estimate of the extent to which tax losses are written off current or future taxable income in a present value sense. Refundability is measured by discounting the estimated proportion of a taxable loss written off by companies through carryback and carryforward provisions. Section III uses the refundability measures to estimate effective tax rates on Canadian firms by industry. Three cases are compared. (i) The Taxpaying Firm. This firm expects to use all deductions and credits immediately. (ii) The Nontaxpaying Firm. This firm expects to be nontaxpaying with probability 1 in the period in which new investment is undertaken. Marginal tax losses on new investment are used up slowly over time.