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  3. American Economic Journal: Economic Policy
  4. February 2023
  5. Implications of Tax Loss Asymmetry for Owners of S Corporations

Implications of Tax Loss Asymmetry for Owners of S Corporations

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Abstract

We study tax loss asymmetry for S corporate owners. These owners use most losses contemporaneously, reducing the tax asymmetry compared to C corporations. However, these owners face distortions due to the progressive individual tax schedule. The value of this asymmetry is approximately $3.5 billion per year. We find that this asymmetry creates disincentives for risky investment and causes allocative inefficiencies among loss and gains owners. Finally, we simulate the effects of certain provisions of the Tax Cuts and Jobs Act; we estimate that these provisions—especially section 199A—reduce the behavioral distortions of the asymmetry for S corporate owners.

Citation

Goodman, Lucas, Elena Patel, and Molly Saunders-Scott. 2023. "Implications of Tax Loss Asymmetry for Owners of S Corporations." American Economic Journal: Economic Policy, 15 (1): 342-69. DOI: 10.1257/pol.20200311

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • H25 Business Taxes and Subsidies including sales and value-added (VAT)
  • H32 Fiscal Policies and Behavior of Economic Agents: Firm
  • K34 Tax Law
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