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The ability of deferred tax to predict future tax
Author(s) -
Mear Kim,
Bradbury Michael,
Hooks Jill
Publication year - 2021
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12564
Subject(s) - economics , deferred tax , tax credit , predictive power , explanatory power , tax basis , public economics , value added tax , econometrics , tax reform , actuarial science , state income tax , gross income , philosophy , epistemology
We examine the usefulness of tax allocation accounting (deferred tax) for predicting future tax paid and future tax expense. Deferred taxes increase the explanatory power ( R 2 ) of regression models where future taxes paid or future tax expense is the dependent variable. However, the mean out‐of‐sample forecast errors for tax paid (future tax expense) is 30 (45.5) percent. Deferred tax increases predictive ability on pooled data, but is inconsistent on a year‐by‐year basis. We examine three explanations for poor predictive ability: losses, tax changes and asset growth. We discuss the policy and practical implications of our findings.