Valuing the Deferred Tax Liability

12 Pages Posted: 27 Jul 1998

See all articles by Richard C. Sansing

Richard C. Sansing

Tuck School of Business at Dartmouth

Multiple version iconThere are 2 versions of this paper

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

Sansing, Richard C., Valuing the Deferred Tax Liability (May 1998). Available at SSRN: https://ssrn.com/abstract=110568 or http://dx.doi.org/10.2139/ssrn.110568

Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
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