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
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: Suggested Citation