When the corporate tax rate was lowered from 46% to 34% in 1986, most firms that had adopted the asset and liability method of deferred tax accounting reported onetime gains as a result of the revaluation of their deferred tax items. In fact, one writer claimed that this lowering of income tax rates “freed a large chunk of money that had been accumulated to pay deferred taxes at the former higher rate.”
In early 1993, Congress was considering raising the corporate income tax rate. One proposal was to raise the top corporate rate from 34% to 36%. Accounting experts pointed out that the increase in the tax rate would cause some firms to report one-time losses and other firms to report one-time gains.
1. Why did the lowering of tax rates in 1986 result in most firms reporting gains, whereas an increase in tax rates in 1993 would cause some firms to report gains and some firms to report losses?
2. Comment on the writer’s statement that the lowering of income tax rates “freed a large chunk of money.”