Finance and Economics Discussion Series (FEDS)
Nothing is Certain Except Death and Taxes: The Lack of Policy Uncertainty from Expiring "Temporary" Taxes
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 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.
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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
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