Implicit Tax, Tax Incidence, and Pretax Returns
Guenther, David A., Sansing, Richard C.
The Accounting Review · 2023 · Volume 98 · Issue 2
Abstract
We investigate the relation between tax rates and pretax returns by showing how implicit tax, tax incidence, and tax capitalization change in response to a tax rate change. We examine these issues in the context of both financial assets and real investments made by corporations in a competitive equilibrium in which all investments earn the same after-tax rate of return. Results show that the pretax return increases in the statutory tax rate due to an explicit tax rate effect and decreases due to a cost of capital effect; the net effect is ambiguous. In contrast, the implicit tax rate is weakly increasing in the statutory tax rate. We also relate our findings to the empirical literature on the effects of taxes on pretax returns. JEL Classifications:H22; H25.
Keywords
tax incidence, tax capitalization, implicit tax, corporate tax
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