Finance and Economics Discussion Series (FEDS)
June 2018
Nothing is Certain Except Death and Taxes: The Lack of Policy Uncertainty from Expiring "Temporary" Taxes
Abstract:
What is the policy uncertainty surrounding expiring taxes? How uncertain are the approvals of routine extensions of temporary tax policies? To answer these questions, I use event studies to measure cumulative abnormal returns (CARs) for firms that claimed the U.S. research and development (R&D) tax credit from 1996-2015. In 1996, the U.S. R&D tax credit was statutorily temporary but was routinely extended ten times until 2015, when it was made permanent. I take the event dates as both when these ten extensions of the R&D tax credit were introduced into committee and when significant CARs on these dates, which suggests that the market anticipated these extensions to become law. My results support the fact that a routine extension of a temporary tax policy is not a generator of policy uncertainty and, therefore, that a routine extension of temporary tax policy is not a fiscal shock.
Accessible materials (.zip)
Keywords: Cumulative Abnormal Returns; Excess Returns; Event Study; Fiscal Policy; R&D; Research and Development; Sunset Provision; Tax Extension; Temporary Tax; Uncertainty Shocks; User Cost of Capital
DOI: https://doi.org/10.17016/FEDS.2018.041
PDF: Full Paper