Barro, Jorge2019-05-292019-05-29Barro, Jorge. "Net Operating Loss Carryforwards and Corporate Tax Policy." (2018) James A. Baker III Institute for Public Policy: <a href="https://www.bakerinstitute.org/research/net-operating-loss-carryforwards-and-corporate-tax-policy/">https://www.bakerinstitute.org/research/net-operating-loss-carryforwards-and-corporate-tax-policy/</a>.https://hdl.handle.net/1911/106070This working paper explores the role of net operating loss carryforwards (NOLCFs) in the decision-making and valuation of large firms.ﾠThis paper explores the role of net operating loss carryforwards (NOLCFs) in the decision-making and valuation of large firms. NOLCFs allow firms to carry losses or negative profits into the future and deduct them from taxable income in a future period. To understand how this tax deduction affects key variables, such as investment, equity distributions, and corporate income tax revenue, I estimate a dynamic firm investment model using simulated method of moments. After determining the deep parameters of the model, I vary policy parameters and evaluate the effects of policy changes on the key moments. For a firm with average assets, the results show that the average NOLCF stock before the 2017 U.S. federal tax reform improved corporate valuation by approximately 5-6%. Further, the 40% decline in the corporate tax rate in 2017 reduced the impact of NOLCFs on corporate valuation roughly proportionally.This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy.Working paperloss carryforwardsfirm heterogeneity