Working Paper

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 the extensions were signed by the U.S. president into law. On average, I find no statistically 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.

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;

JEL Classification: E62; G12; G14; G17; H25; H39; K34; O31;

https://doi.org/10.17016/FEDS.2018.041

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2018-06-22

Number: 2018-041

Pages: 36 pages