ABSTRACT This study examines how disclosure complexity affects tax enforcement outcomes. Consistent with complex disclosures hindering the IRS’s ability to identify and sustain adjustments to aggressive tax positions, we find that greater disclosure complexity is associated with less government-favorable enforcement outcomes. This effect is greater among taxpayers likely to have engaged in higher levels of tax avoidance but is attenuated among fiscal-year filers and in the post-Tax Cuts and Jobs Act (TCJA) period. Additional analyses show that the effect remains robust to alternative settlement windows and entropy balancing. Overall, our findings suggest the IRS could increase the favorability of enforcement outcomes by evaluating disclosure complexity as part of its pre-audit risk assessment process. Data Availability: All data are available from publicly available sources mentioned in the paper. JEL Classifications: D22; D23; D61; H25; H26; M41; M48.
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.
