Tax subsidy increases in anticipation of tax rate changes

Corporate tax rate changes are an incentive for high marginal tax (HMT) firms to shift taxable income into a period of lower tax rates. The Tax Reform Act of 1986 (TRA 86) reduced the top corporate statutory rate for ordinary income from 46% to 34%, and increased the corporate rate on net capital gains (NCGs) from 28% to 34%. Given the effective dates of TRA 86, HMT firms had an incentive to delay recognition of ordinary taxable income from 1986, and these firms had an incentive to accelerate NCGs into 1986.Prior research has shown that HMT firms shifted book-tax conforming income away from 1986. The present study finds that HMT firms shifted non-conforming income (i.e. the difference between pre-tax income and taxable income) into 1986. It also finds that HMT firms shifted NCGs (a tax subsidy due to preferential tax rates) into 1986. This evidence of shifting behavior suggests that implicit tax costs, as well as other cost disincentives, were insufficient to offset the tax rate change incentives.