Why Some Corporations Pay More Tax Than Neccessary

Abstract:  . It has been noticed in several countries that many corporations do not claim all of their allowable tax depreciation deductions, despite incurring a higher tax cost. There are several possible explanations. First, the uniform reporting accounting system (typical of many European countries) can under certain circumstances constrain dividends. The dividend constraint can, however, be loosened by forgoing some tax depreciation. We find only weak support for this hypothesis. Second, we find strong evidence that corporations with bad economic performance tend to underutilise their deductions, suggesting that corporations use costly "windowdressing" on their accounting measures. Third, we find support for the hypothesis that tax compliance costs discourage the utilization of accelerated depreciation, especially by small firms. Fourth, we find weak support for the hypothesis that there is substitution between tax depreciation and private debt due to competition between the benefits of priva...