ABSTRACT This study examines the effects of sales tax collection requirements on firm location decisions following a U.S. Supreme Court decision (South Dakota v. Wayfair, Inc.) that newly permits states to compel out-of-state sellers to collect sales tax. Given concerns that pre-Wayfair rules distorted economic activity by incentivizing remote sellers to locate in fewer states, I examine firm location choices around the decision. Using establishment-level data in a difference-in-differences framework, I do not find evidence of remote sellers broadly entering new states shortly after Wayfair. However, conditional on expanding to new states, remote sellers are approximately 11 percent more likely to enter high-sales-tax states in the near term after the case relative to traditional retailers, consistent with firms considering sales tax collection in their location decisions. Data Availability: Data used in this study are publicly or commercially available from the sources identified in the text. JEL Classifications: H25; H71; R39.
The enactment of Obamacare in 2013 greatly limits the tax deductibility of performance pay for health insurance companies. Using a difference-in-differences analysis, we find that despite increased after-tax costs, there is limited evidence that the treated firms change the level of total compensation. Focusing on specific compensation components, we find that the treated firms significantly reduce nonequity performance pay, with no significant changes in equity performance pay. Among CEOs, we find some evidence of substitution, with reduced nonequity performance pay accompanied by increased nonperformance compensation. These findings suggest that managing tax liabilities is crucial for executive compensation design, provided that long-term managerial incentives are not compromised. Finally, we find that health insurance companies increase the use of debt after 2013, suggesting that the deductibility of compensation expenses is an important nondebt tax shield.
In response to the imposition of a cap on individuals claiming a federal itemized deduction for state and local income taxes paid, many U.S. states have enacted pass-through entity tax (PTET) legislation permitting pass-through entities to pay and deduct state income taxes at the entity level rather than the owner level. We estimate that the enactment of PTET legislation is associated with a $21,889 on-average annual decrease in high-income taxpayers' reported pass-through income, resulting in $13.3 billion less in aggregate annual federal income taxes paid assuming a marginal rate of 24 percent. However, despite this increase in business owners' after-tax cash flows, we fail to find evidence that PTET legislation spurs GDP growth. Our findings contribute to the literatures examining pass-through entity taxation and the consequences of state income tax policy. We also provide policymakers important and timely evidence on the economic costs and benefits of PTET legislation.
I examine the effects of taxation on parent-subsidiary mergers in Korea, where tax consolidation was not allowed and, after the merger, only the parent's pre-existing losses offset subsidiary profits. Specifically, I focus on mergers in which a parent and a wholly owned subsidiary combine into a single legal entity (a P-S merger), involving no cash transfers, ownership changes, or significant synergies. Most P-S mergers occur between profitable and loss-making firms, suggesting tax motivations. Merger announcement returns are positively associated with estimated tax savings. However, returns are lower for loss-making subsidiaries, especially without a parent debt guarantee. This reflects the loss of limited liability protection and limits on utilizing subsidiary losses. Nevertheless, positive returns may reflect expected future tax benefits if the subsidiary continues to incur losses. The results suggest that tax considerations, together with the loss of limited liability protection, play an important role in shaping parent-subsidiary structures.
We investigate whether firms requesting private letter rulings (PLRs) from the Internal Revenue Service (IRS) face higher IRS audit intensity. PLRs offer tax certainty by clarifying the tax implications of specific transactions, but they also require firms to incur high costs and provide detailed disclosures. Using a sample of firm-years from 2006 to 2019, we examine the relationship between PLR requests and IRS audit intensity. Across three proxies of IRS scrutiny, we find that PLR firms face higher IRS audit intensity. Further, we find that tax-free restructuring transactions do not explain these results and that the results do not generalize to tax opinions from external advisors, suggesting that the IRS directs greater scrutiny specifically toward PLRs rather than toward their underlying transaction complexity. Overall, we extend the nascent PLR literature by providing evidence of an unintended consequence of seeking tax certainty.
China's State Taxation Administration introduced a tax credit rating system for enterprises in 2014 with the primary objective of fostering tax compliance and enhancing market transparency. We examine the capital market outcomes of this state-led tax information disclosure initiative. Our empirical evidence shows that higher tax credit ratings signal lower future stock market risk. In addition, compared with industrial peers, firms with an A rating benefit from lower debt (23 basis points) and equity (34.3 basis points) financing costs, alongside expanded access to trade credit. These effects are particularly pronounced among non-state-owned firms, those with lower transparency, and those demonstrating less aggressive tax avoidance. Overall, our findings underscore the positive externalities of this "soft" tax regulatory system by showing that it can serve as a new signaling mechanism that reduces information asymmetry between firms and outside stakeholders.
This study examines how the Chinese government's public release of corporate taxpayer ratings based on tax compliance affected firms' access to debt financing. We find that, in the absence of formal debt credit ratings, top taxpayer ratings increase firms' access to debt financing. Top-rated firms enjoy more diversified lender bases, have a higher likelihood of securing loans from nonlocal banks, and obtain loans from a greater number of banks. The taxpayer ratings affect firms' debt financing by reducing information asymmetry related to tax uncertainty, agency problems, and transparency. Additionally, the positive impact of top taxpayer ratings on access to debt financing is more pronounced for firms in the service sector and those operating under weaker banking supervision. Overall, our results suggest that taxpayer ratings help banks evaluate borrowers' risks when credit ratings are not otherwise available.
This study examines whether firm-specific tax policy uncertainty (TPU) influences corporate investment decisions. Investment theory predicts that, with uncertain project cash flows, firms should elect to delay committing to investments. Consistent with this prediction, we find that TPU is negatively associated with both tax planning and other investments, incremental to the firm's nontax uncertainties. In exploring the consequences of greater TPU, we find TPU is associated with inefficient underinvestment, which negatively impacts future firm profitability. We further show that, during periods of unusually high TPU, when tax planning investments are especially more valuable, firms appear to substitute away from general investments toward tax planning. These findings suggest that firms prefer to direct resources toward engaging with tax experts for guidance when the tax environment is more uncertain. Overall, we find that tax policy uncertainty has a negative effect on corporate investments and future firm performance.
We examine whether executives’ equity-based compensation incentives, tied to firm value (delta) and risk-taking (vega), influence the extent of firms’ tax-motivated income shifting. Prior literature suggests a broad association between compensation incentives and tax avoidance. However, it is unclear whether specific tax avoidance activities or manager preference in selecting the optimal mix of these activities drive this association. We find that delta is positively associated with income shifting, suggesting that executives behave as if income shifting is value enhancing, on average. We also find that this association is incrementally more positive among executives with greater ability. We fail to find an association between vega and income shifting, suggesting that risk-taking incentives are not clearly linked with income shifting. These findings suggest that different components of compensation incentivize managers to engage in certain types of tax avoidance activities and the value enhancing benefits of income shifting dominate potential increases in risk.
We examine factors that potentially moderate the impact of corporate tax avoidance on individuals' perceptions of a firm's overall corporate social responsibility (CSR) and, in turn, on potential consequences of CSR perceptions. We find that a firm's nontax CSR activities and its stakeholders' financial sophistication, but not the aggressiveness of the tax avoidance strategy itself, moderate the impact of avoidance on overall CSR perceptions. Further, although these CSR perceptions have no impact on assessments of firm value, they do mediate the impact of avoidance on stakeholders' willingness to invest in and patronize the firm. Finally, we find that reactions to avoidance differ across countries with varying views regarding the broader roles and responsibilities of corporations. The study corroborates and extends prior research examining the reputational costs of avoidance, providing insight for firms considering the nature and extent of their avoidance activities as well as for regulators considering related disclosures.
Many CEOs are philanthropists who express their passion for social welfare through work with various charities and foundations. However, the consequences of these prosocial behaviors for their firms are unclear. This study investigates whether CEOs' prosocial tendency, measured by their service on the boards of one or more charities, is associated with corporate tax aggressiveness. We find that firms with CEOs who have prosocial tendency have a lower level of tax aggressiveness than firms with CEOs who do not have this tendency. We further find that financial incentives may diminish the inhibitory effect of CEO prosocial tendency on corporate tax aggressiveness. By contrast, a firm's positive reputation could strengthen the inhibitory effect of prosocial tendency on tax aggressiveness. Our results provide evidence that CEO prosocial tendency influences a firm's tax planning and policies.
We re-examine the role of tax authority monitoring in equity pricing. Prior research documents a negative association between IRS audit probability and the cost of equity capital. By contrast, when using improved audit probability data and two firm-specific tax authority monitoring proxies, we identify a positive association between tax authority monitoring and the cost of equity. We find that a nonlinear association between monitoring and the cost of equity potentially accounts for these contradictory conclusions. Our results suggest that, on average, investors perceive the potential negative consequences of tax authority monitoring (e.g., increased tax payments) as outweighing the value-enhancing consequences (e.g., reduced managerial rent extraction), resulting in a higher cost of equity. Consistent with this interpretation, our results are stronger among firms with the opportunity to engage in intangibles-based income shifting, a lucrative but highly scrutinized tax avoidance opportunity, and weaker among firms without other strong external monitoring mechanisms.
Tax footnotes, particularly disclosures of unrecognized tax benefit (UTB) accruals, contain significant information. To aid large-sample empirical research, and assess reliable measures of the favorability of tax settlements, we compare three potential proxies of footnote information: two derived from quantitative information and one derived from qualitative information. To validate the proxies, we use hand-coded disclosures about the nature of UTB settlements and an empirical model of the revaluation of prior, open tax positions at the time of settlement. We find that the textual analysis method to infer settlement favorability from qualitative text in tax footnotes performs well in both validations. Conversely, the tax rate reconciliation proxy is discriminant only in the first validation, whereas the accrual of interest and penalties proxy relates to settlement favorability only in the second validation. Overall, the qualitative proxy is most reliable and represents a new and useful measure for the empirical tax literature.
This study investigates whether increased private tax disclosures have implications for the quality of firms' public financial reporting in the context of Schedule UTP. I find that firms revert from being over-reserved to being adequately reserved post-Schedule UTP, suggesting increased relevance of tax reserve accounting. Additional analyses further reveal that firms report more neutral tax settlements and fewer tax-reserve-related tax rate reconciliation items post-Schedule UTP. In terms of firms' opportunistic behavior, I find that firms may substitute tax expense management for other accrual management post-Schedule UTP, implying that although Schedule UTP may have, to some extent, achieved the goal intended by FIN 48, this could come at the cost of reduced quality of other accruals. Overall, this study provides consistent evidence that increased private tax disclosures have positive externalities on tax reserve accounting.
We argue that tax researchers in accounting should expand the scope of their inquiry to include all types of taxes paid by all types of taxpayers, and that editors and reviewers should be more willing to review and consider such papers. Accountants in practice engage with a wide variety of taxes-such as payroll, sales, property, carbon, and other excise taxes-yet tax accounting scholars and journals have largely ignored these areas. We propose that broadening the scope of tax research will better align academic inquiry with real-world practice and public policy. Furthermore, we contend that accounting scholars bring valuable skills to the table for studying the effects of these taxes, given their institutional knowledge, familiarity with tax and accounting data, and experience with taxpayer behavior. By encouraging research on a broader set of taxes, accounting journals and tax accounting scholars have the potential to expand their impact and relevance.
Using a survey of tax auditors concerning 791 audited firms, this study examines which auditor characteristics are most important for tax audit efficiency and how auditor assignment based on case complexity can improve efficiency. We find that theoretical knowledge acquired through training courses and soft skills, such as work motivation, stress resistance, and professional skepticism, are equally important predictors of tax audit efficiency. This finding shows that the education of tax auditors should include soft skills training. Moreover, we demonstrate that auditors' work motivation and, most notably, practical knowledge gained through both general and firm-specific experience play a significantly greater role in complex cases than in less complex cases. Therefore, considering these individual auditor characteristics when assigning auditors to cases can improve tax audit efficiency. Thus, our results have several implications for auditor recruitment, training, and allocation to increase the efficiency of tax audits.
Federal and state governments forgo significant revenue by using tax expenditures to achieve social policy goals. To facilitate recent initiatives toward evidence-based policymaking, we examine the determinants and consequences of state adoption tax credits. We find no evidence that implementation is associated with incremental foster care adoption outcomes on average. We then utilize our state setting to examine the incremental effect of adoption credits on specific segments of the foster care population and of specific credit characteristics. We find that adoption tax credit implementation is associated with increased adoptions of children without medical needs and infants, and faster adoptions for nonwhite foster children. Further, we find more and faster adoptions in low-income states and faster adoptions when the credit is targeted to benefit in-state adoptions. Finally, our results suggest that a recurring adoption tax credit is a more effective policy choice than the size of the creditor refundability.
ABSTRACT In 2016, the U.K. passed a regulation that requires large businesses to publicly disclose their tax strategy. The U.K. regulator expects these qualitative disclosures to attract public scrutiny of firms’ tax practices, thereby pressuring firms to reduce tax avoidance. This study examines whether the U.K. tax strategy disclosure requirement has achieved this objective. Using a difference-in-differences design and a sample of U.K. publicly traded firms, I find evidence that is most compatible with the regulation not having a significant impact on firms’ tax avoidance. Inferences are similar when I focus on subsamples that are most likely to exhibit the intended behavioral changes using a series of cross-sectional tests within treated firms. Thus, the collective evidence is largely inconsistent with the regulation successfully curbing tax avoidance, which should inform regulators worldwide as they consider implementing similar disclosure regulations to combat corporate tax avoidance. Data Availability: Data in this study are obtained from public sources as identified in the paper. JEL Classifications: H20; H26; M41.
Audited taxpayers can be compelled to expend both monetary and nonmonetary resources during an audit, irrespective of compliance levels. We refer to these audit-related expenditures as "audit burden," and examine how they impact subsequent compliance decisions. Motivated by cost-loss framing theory, we predict audit burden influences individuals who were initially noncompliant (compliant) on an audited return to subsequently increase (decrease) compliance. Consistent with hypotheses, results from our first experiment suggest burdensome audits deter noncompliance for those who evaded, but also precipitates noncompliance for initially compliance taxpayers. A second experiment shows results are robust to alternative operationalizations of audit burden. Mediation analysis from our third experiment suggests the effect of audit burden results from differences in how groups respond to the perceived expenditure of audit burden. Finally, results from our fourth and final experiment suggest a simple apology can weaken the compliance-reducing effect of burdensome audits on initially compliant individuals.
We examine how uncertainty affects U.S. multinational firms' outbound income shifting. Based on the Joint Committee on Taxation (2010) Report, we contend that tax savings from income shifting are closely tied to sales and therefore expect that demand uncertainty is a relevant factor driving the association between uncertainty and income shifting. We find that both worldwide and regional demand uncertainties constrain outbound income shifting, and the impact of demand uncertainty is greater when the cost of modifying income-shifting structures is likely to be higher. We split common proxies for uncertainty into demand and profit margin components and find that only demand uncertainty is reliably negatively associated with outbound income shifting. Our study extends prior work linking uncertainty to investment in tax planning by linking the nature of an important set of tax minimization strategies -income shifting-to the relevant uncertainty construct and sheds light on the "undersheltering puzzle."
