A Decision Model for Tax Preference Items

Petri, Enrico; Minch, Roland A.
April 1978
Accounting Review;Apr78, Vol. 53 Issue 2, p415
Academic Journal
A popular rule of thumb asserts that an extra tax deduction will generate a tax benefit equal to the tax rate times that deduction. This paper shows that when the extra tax deduction is a preference item, this rule of thumb can be economically harmful. The decision model presented in this paper examines the implications of taking extra tax deductions of preference items in the light of the minimum-maximum tax structure set forth in the 1976 Tax Act. The corporation tax situation with respect to the preference tax structure is also considered. The impact of the preference tax deduction is analyzed under a number of constraints and illustrated with a specific set of data. The generality of the conclusions reached is then tested by quantitative techniques.


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