Valuing the Deferred Tax Liability
12 Pages Posted: 27 Jul 1998
There are 2 versions of this paper
Valuing the Deferred Tax Liability
Date Written: May 1998
Abstract
Using a model of corporate investment in which the deferred tax liability never reverses, I show that deferred taxes are a real economic burden whose value is the amount recognized multiplied by a fraction. The numerator of the fraction is the tax depreciation rate, and the denominator of the fraction is the sum of the tax depreciation rate and the cost of capital. Intuitively, even though the deferred tax liability never reverses, the difference between tax and book depreciation decreases over time because the tax bases of the assets gradually diverge from their book value.
JEL Classification: M41, M44
Suggested Citation: Suggested Citation
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