Firm responses to book income alternative minimum taxes

Abstract

This paper studies how firms respond to book income alternative minimum taxes (AMTs) by examining the AMT book income adjustment in 1987. Using Compustat data and an event study approach, I find no evidence that firms avoid the tax, and no evidence of significant real production or investment responses. Firm tax base responses imply an elasticity of book income of $-0.03$ [$-0.63$,$0.56$], smaller than previous estimates because I correct for mean reversion. The null results indicate that firms face strong, non-tax incentives to report high book incomes.