Utilization of tax allowances

Swedish tax-paying firms have systematically failed to take full advantage of the allowances granted by the government. The average utilization level varied between 62 and 86 percent in the years 1979-1993. The Swedish tax-cut cum basebroadening tax reform in 1991 meant that the amount eligible for appropriation to untaxed reserves was much reduced. Our results show that the proportion of firms that fully utilize the allowances has increased since the reform. One interpretation of this is that the importance of the tax system for the incentive to invest has increased, since the user cost of capital is unaffected by the corporate tax if firms have unutilized tax allowances. Contrary to what is commonly believed our results suggest that dividend payments are not the main reason for abstaining from tax allowances.