How do corporate tax bases change when corporate tax rates change? With implications for the tax rate elasticity of corporate tax revenues

We construct a new database of extensive margin changes to multiple aspects of corporate tax bases for OECD countries between 1980 and 2004. We use our data to systematically document the tendency of countries to implement policies that both lower the corporate tax rate and broaden the corporate tax base. This correlation informs our interpretation of previous estimates of the relationship between corporate tax rates and corporate tax revenues, which typically do not include comprehensive measures of the corporate tax base definition. We then re-examine the relationship between corporate tax rates and corporate tax revenues. We find that accounting for unobserved heterogeneity attenuates the relationship between corporate tax rates and corporate tax revenues, and increases the implied revenue-maximizing tax rate. Controlling for our new tax base measures does not substantively impact the magnitude of this relationship.     

Do tax decision support systems affect the accuracy of tax compliance decisions?

Tax complexity has increased over the years as laws and regulations have been consistently added to the existing code sections. This complexity directly affects taxpayer compliance; complexity reduces taxpayer compliance. Along with the rise in complexity has come an increased use of tax preparation software such as TurboTax to combat the rising intricacy. This software is designed to help users properly complete a tax return and, as a result, increase taxpayer compliance. These software packages represent sophisticated tax decision support systems (TDSS) used by both professional tax preparers and individual taxpayers alike. While the availability and use has risen dramatically over the past few years, little research has been conducted to determine the impact of TDSS on tax preparers' decisions. The purpose of this study is to examine whether tax preparers manually preparing a tax return make the same decisions as tax preparers aided by a TDSS. The Theory of Technology Dominance suggests (1) that less experienced users will not be able to adequately use the TDSS and will make inferior decisions when compared to more experienced users and (2) that more experienced decision-makers using a TDSS will make better decisions than their counterparts preparing a return manually. The results support the propositions of the theory and show that less experienced tax preparers using a TDSS make inferior decisions when compared to more experienced tax preparers. The less experienced tax preparers report higher taxable income and higher tax liability. The results also indicate that using a TDSS can help both experienced and novice tax preparers make better decisions even though the novices cannot perform at the level of experienced tax preparers. This study concludes tax compliance is improved with the use of a TDSS.     

Efficiency of capital taxation in an open economy: tax competition versus tax exportation

Tax competition and tax exportation have contrary implications for the efficiency of capital taxation. We provide a simple condition for the dominance of either force, which depends on the mobility of foreign investment. We use this condition to evaluate the relative importance of both forces in the US and in the EU. This paper has benefitted substantially from the comments of the editor, Jay Wilson, and three anonymous referees.     

Does tax convexity matter for risk? A dynamic study of tax asymmetry and equity beta

The purpose of this study is to explore the effect of tax convexity on firms’ market risk, where tax convexity measures the progressivity of firms’ tax function. We examine the relation between equity beta and tax convexity based on a standard contingent-claims model, in which firms face nonlinear tax schedules. We verify that in the presence of default and growth options, the effect of tax convexity on beta is significant and depends on several countervailing forces. Tax convexity has a direct, positive effect on beta, as well as two indirect countereffects through default and growth options. The overall effect is ambiguous and quantitatively significant. As asymmetric tax schedules are used in most countries, assuming a linear tax schedule in the valuation framework may misestimate beta and thus fail to assess risk accurately. Our theoretical model shows that tax convexity should be taken into consideration when estimating equity beta.     

Reducing added tax on some resource products

The Ministry of Finance and the State Administration of Taxation gave a notice to specify the added tax policies for the comprehensive utilization of some resources and other products, which would be implemented from January 1, 2004.     

Do government preferences matter for tax competition?

This paper explores how government preferences affect capital tax decisions of a country. We develop a model in which governments, differentiating in their preferences for economic development and income equality, compete for mobile capital over corporation taxes. The key prediction of the model, borne out in data from OECD countries over the years 1990–2012, is that an increase in government preferences for pursuing economic development relative to income equality makes countries’ horizontal tax reactions stronger. Unlike the existing studies, our result contributes to the tax competition literature by highlighting the importance of government preferences in determining the extent of tax competition among countries and so offering a novel explanation for the widely observed heterogeneous tax policies across countries.     

Does the income tax affect marital decisions?

"This paper discusses new empirical evidence on the role of income tax incentives in marital decisions [in the United States]. Time-series evidence suggests that taxes have a small but statistically significant effect on the aggregate marriage rate; however, this evidence is sensitive to the time period and the measure of marriage. Additional evidence, based on household longitudinal data, indicates that the probability of marriage falls and that of divorce rises with an increase in the so-called marriage tax, and that the timing of marriage (though not of divorce) is also affected by taxes. In short, there is strong evidence that taxes affect some marital decisions."     

An examination of firms’ responses to tax forgiveness

This study uses state tax amnesties to examine how firms respond to forgiveness—particularly repeated forgiveness—by a taxing authority. We posit that tax forgiveness programs alter taxpayer perceptions of the probability of detection by enforcers or the probability of future forgiveness programs, either of which could affect future tax aggressiveness. We find that firms headquartered in an amnesty-granting state increase state income tax aggressiveness following the first instance of tax amnesty, relative to control firms in other states. Moreover, we find evidence that tax aggressiveness incrementally increases with each additional repetition of a tax amnesty. Finally, we find that the effect of amnesties on tax aggressiveness is more prominent for small firms, which face less scrutiny and for which the tax aggressiveness measures are less confounded. Our findings suggest that repeated programs of tax forgiveness have increasingly negative implications for corporate tax collections.     

Have the tax benefits of debt been overestimated?

We re-examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields. We show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions. We develop improved estimates of marginal tax rates using a non-parametric procedure that produces more accurate estimates of the distribution of future taxable income. We show that additional debt would provide firms with much smaller tax benefits than previously thought, and when expected distress costs and difficult-to-measure non-debt tax shields are also considered, it appears plausible that most firms have tax-efficient capital structures.     

How does quasi-indexer ownership affect corporate tax planning?

We study whether, and more importantly, through what mechanisms, quasi-indexers affect portfolio firms’ tax planning by employing the discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Using a regression discontinuity design, we find that higher quasi-indexer ownership leads to greater tax saving. With respect to the mechanisms, we find that the greater tax saving is a result of a focus on improved overall firm performance, not a specific focus on improved tax planning. We further find that the documented tax saving effect is partially due to quasi-indexers’ influences on executive equity incentives, corporate governance, and information environment.     

Investor valuations of Japan’s adoption of a territorial tax regime: quantifying the direct and competitive effects of international tax reform

This paper examines the impact of Japan’s 2009 adoption of a territorial tax regime using event study methods which leverage individual firm characteristics to identify underlying drivers of market reactions. Differences in Japanese firms’ foreign and domestic effective tax rates yield an aggregate capitalization effect of \(\yen \)4.3 trillion, while firms with less prior foreign exposure and fewer opportunities for tax avoidance experienced relatively larger abnormal returns. We attribute these results to tax savings on existing undistributed foreign earnings, enhanced opportunities for international expansion, and cultural biases against tax planning. Spillovers to the US (through tax or firm competition) appear insignificant.     

Does reduced trade tax revenue affect government spending patterns?

Many skeptics of trade liberalization in the developing world argue that lowering trade taxes can cause significant fiscal pressures in countries particularly reliant on these taxes and result in a reallocation of resources away from important development goals. This paper evaluates whether there is evidence that central governments systematically change the composition of spending priorities in the wake of lowered trade tax revenues as a share of total government revenues. We find no systematic evidence for this concern in a sample of 51 developing countries for the 1991 through 2005 period.     

Can tax convexity be ignored in corporate financing decisions?

The standard modeling practice in corporate finance has been to assume a linear tax schedule. This paper extends the structural contingent-claim model of corporate finance to incorporate a more realistic convex tax schedule. It is shown that tax convexity raises the optimal default boundary and thus increases the likelihood of default, and also reduces the optimal leverage ratio. While the former effect seems insignificant in general, the effect of tax convexity on the optimal leverage ratio can be quantitatively significant. We conclude that tax convexity should not be ignored in corporate financing decisions, and theoretical models should use a convex tax schedule instead of a linear one. Thus, the short answer to the question in the title is “No”.     

Analysts’ pre-tax income forecasts and the tax expense anomaly

This paper examines whether analysts’ pre-tax income forecasts mitigate the tax expense anomaly documented by Thomas and Zhang (J Account Res 49:791–821, 2011). They find that seasonal changes in quarterly income tax expense are positively related to future returns after controlling for the earnings surprise and conclude that investors underreact to value-relevant information in tax expense. When analysts issue both earnings and pre-tax income forecasts, they implicitly provide a forecast of income tax expense. We posit that this implicit forecast helps investors recognize the persistence of current tax expense surprise for future earnings. Accordingly, we expect that mispricing of tax expense will be less severe for firms with earnings and pre-tax income forecasts. As expected, we find that the presence of pre-tax income forecasts significantly weakens the positive relation between tax expense surprise and future returns, consistent with analysts’ implicit forecasts of tax expense mitigating the tax expense anomaly.     

International tax competition: do public good spillovers matter?

We study the impact of public good spillovers on tax competition between two imperfectly integrated countries with different levels of productivity. We show that international public good spillovers, by reducing the tax gap between countries, strengthen the agglomeration of firms in the most productive country. Then we carry on a welfare analysis. We first assume that governments are engaged in a redistributive tax policy. At the non-cooperative equilibrium, the tax level in the high-productivity country is inefficiently high while it is inefficiently low in the other country. A different conclusion emerges when tax revenues are recycled in a public good provision: taxes are inefficiently low in both countries and public good spillovers increase the global welfare. Finally, for a given amount of total tax revenues, public good provision in the high-productivity country is inefficiently high compared to its level in the low-productivity country.     

Are family firms more tax aggressive than non-family firms?

Taxes represent a significant cost to the firm and shareholders, and it is generally expected that shareholders prefer tax aggressiveness. However, this argument ignores potential non-tax costs that can accompany tax aggressiveness, especially those arising from agency problems. Firms owned/run by founding family members are characterized by a unique agency conflict between dominant and small shareholders. Using multiple measures to capture tax aggressiveness and founding family presence, we find that family firms are less tax aggressive than their non-family counterparts, ceteris paribus. This result suggests that family owners are willing to forgo tax benefits to avoid the non-tax cost of a potential price discount, which can arise from minority shareholders’ concern with family rent-seeking masked by tax avoidance activities [Desai and Dharmapala, 2006. Corporate tax avoidance and high-powered incentives. Journal of Financial Economics 79, 145–179]. Our result is also consistent with family owners being more concerned with the potential penalty and reputation damage from an IRS audit than non-family firms. We obtain similar inferences when using a small sample of tax shelter cases.     

Web-based practice and feedback improve tax students’ written communication skills

To prepare students for successful accounting careers, educators must be involved in developing students’ written communication skills. This article provides evidence that web-based lessons and self-tests appearing at www.gsu.edu/~accerl and dealing with three sentence structure issues significantly improve written communication skills. Our study involves control and treatment groups in a pre- versus post-treatment design. The authors measure passive voice, punctuation, and wordiness through in-class quizzes and writing assignments. Prior research has shown that a combined approach of lectures addressing writing skills within accounting classes, writing consultants, and detailed grading of assignments improve students’ written communication skills. However, this combined approach involves significant in-class time, departmental funds, and professor time. In contrast, this study shows that improved writing can occur without the substantial institutional resources these prior approaches required.     

The “flat tax(es)”: principles and experience

This paper reviews experience with the ‘flat taxes’ that have been adopted in many countries in recent years. It stresses that they differ fundamentally, and that empirical evidence on their effects is very limited. This precludes simple generalization, but several lessons emerge: there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases, they may have increased progressivity (including through the impact on compliance); adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. A key reason for adoption of the flat tax seems to have been to signal a fundamental shift toward a market-oriented policy regime. Looking forward, as the value of the signal diminishes and familiar political economy forces reassert themselves, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.      

FDI determination and corporate tax competition in a volatile world

This paper investigates the impact of economic and political volatility on corporate tax rates on a large dataset of countries over the 1983–2003 period. Estimation of a dynamic tax rate equation supports the hypothesis that economic volatility negatively affects statutory corporate tax rates, while political volatility has no significant effect. In order to identify the channels through which volatility works, we estimate a structural model allowing for simultaneous determination of corporate tax rates and FDI inflows, and find that economic volatility affects the corporate tax setting process through its impact on FDI inflows.