<p>The structure of the tax ladder is such that the <em>marginal</em> tax rates keep increasing. The upshot is that if you earn more, your net earning (after taxes) will never be lower. So a company with a good year will always be better off compared to a company with a bad year, holding everything else equal. In this sense, tax does not provide advantage to companies with a bad year.</p>

<p>Your idea of "insurance policy" would be most closely related to the concept of <a href="https://en.wikipedia.org/wiki/Automatic_stabilizer#Induced_taxes" rel="nofollow noreferrer">automatic stabilizer</a>. But this concept talks about the macro picture of the entire economy, so I'm not sure if it's wise to link the two together.</p>

CC BY-SA 4.0
2019-11-21T07:47:29.920Z
2019-11-21T07:47:29.920Z
Art
<p>I'm a graduate student in mathematics, with a casual knowledge of economics, so please let me know if this question is a non-sequitur or off base.</p>

<p>Here's the intuition I'm trying to capture: Suppose corporation A has a good year and makes a lot of profit, and corporation B, their competitor, has a bad year wherein they have a net loss. It seems that the following year, corporation B has a relative competitive advantage, in that they have a lower tax burden. </p>

<p>In a system with no corporate tax—and thus no tax loss carryforward—it seems that corporation B wouldn't have this advantage which might give them some time to recover. In a system with a very high corporate tax, this benefit would be even greater.</p>

<p>Value judgments about the utility of a high corporate tax aside, is there anything to the idea that corporate taxes can serve as a sort of "insurance policy" wherein companies with a bad year are more likely to survive?</p>

<taxation><corporate-finance>
Can corporate tax loss carryforward function like a sort of insurance policy?
Peter Kagey
# Can corporate tax loss carryforward function like a sort of insurance policy?

(Asked by: username_0 on 2019-03-27)

I'm a graduate student in mathematics, with a casual knowledge of economics, so please let me know if this question is a non-sequitur or off base.

Here's the intuition I'm trying to capture: Suppose corporation A has a good year and makes a lot of profit, and corporation B, their competitor, has a bad year wherein they have a net loss. It seems that the following year, corporation B has a relative competitive advantage, in that they have a lower tax burden.

In a system with no corporate tax—and thus no tax loss carryforward—it seems that corporation B wouldn't have this advantage which might give them some time to recover. In a system with a very high corporate tax, this benefit would be even greater.

Value judgments about the utility of a high corporate tax aside, is there anything to the idea that corporate taxes can serve as a sort of "insurance policy" wherein companies with a bad year are more likely to survive?

**Tags:** taxation, corporate-finance

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## 1 answers

### Answer by username_1 on 2019-11-21. Score: 1

The structure of the tax ladder is such that the *marginal* tax rates keep increasing. The upshot is that if you earn more, your net earning (after taxes) will never be lower. So a company with a good year will always be better off compared to a company with a bad year, holding everything else equal. In this sense, tax does not provide advantage to companies with a bad year.

Your idea of "insurance policy" would be most closely related to the concept of [automatic stabilizer](https://en.wikipedia.org/wiki/Automatic_stabilizer#Induced_taxes). But this concept talks about the macro picture of the entire economy, so I'm not sure if it's wise to link the two together.


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