Firms' Responses to Anticipated Reductions in Tax Rates: The Tax Reform Act of 1986

The reduction in statutory tax rates from 46% prior to the 1986 Tax Act to 34% by the middle of 1988 gave firms an incentive to defer income in 1986 and 1987. Evidence is provided that firms deferred revenue recognition and/or accelerated expense recognition in anticipation of these declining tax rates. Two models are used to assess whether firms shifted income to future periods when they anticipated lower tax rates. The results suggest that, on average, 812 of the sample firms saved approximately $500,000 in taxes by deferring sales for one quarter. There is evidence of income shifting for each of the 3 largest quintiles of sample firms, but not for the 2 smallest size quintiles, which suggests that smaller firms are less opportunistic tax planners.