Nothing is Certain Except Death and Taxes: The Lack of Policy Uncertainty from Expiring "Temporary" Taxes

37 Pages Posted: 28 Jun 2018 Last revised: 21 Feb 2019

See all articles by Andrew C. Chang

Andrew C. Chang

Board of Governors of the Federal Reserve System

Date Written: 2018-06-22

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

Suggested Citation

Chang, Andrew C., Nothing is Certain Except Death and Taxes: The Lack of Policy Uncertainty from Expiring "Temporary" Taxes (2018-06-22). FEDS Working Paper No. 2018-041, Available at SSRN: https://ssrn.com/abstract=3203583 or http://dx.doi.org/10.17016/FEDS.2018.041

Andrew C. Chang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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