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To The Nimble Go The Biggest Tax Breaks

Economic Trends


When Congress acted in 1986 to cut corporate income taxes, it gave some corporations an even bigger break than it may have intended. That's because companies changed their behavior to capitalize on the drop in the tax rate from 46% to 34% that was phased in during 1987 and 1988. According to a new study by economists Myron Scholes and Mark Wolfson of Stanford University's business school and Peter Wilson of the Harvard business school, many companies were able to shift their income and expenses to cut their overall taxes during the transition period.

The three researchers analyzed the financial statements of some 812 publicly traded companies in the 1986-88 period. They found that an average company was able to reduce its tax liabilities by about 2% during the three years by accelerating such expenses as pension contributions and outlays for advertising and R&D and by moving sales into years when the lower taxes applied. For the sample as a whole, the total amount of taxes avoided by such actions came to an impressive $373 million.

Not every company was nimble enough to cash in on the tax change. The researchers estimate that 98% of the savings were reaped by the top 20% of their sample, big corporations whose sales ran into the billions. The average member of this select group managed to ring up tax savings of $2.24 million.GENE KORETZ

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