Estimating Corporate Tax Avoidance With Accounting-Based Measures

Abstract

Dyreng et al. (2017) find that the effective tax rates for both foreign and domestic corporations have steadily declined over the past quarter century. However, contrary to conventional wisdom, the authors also find that U.S. multinational corporations do not have a tax-based cost advantage relative to their domestic counterparts. We investigate this unexpected finding by reexamining corporate income taxes over the past quarter century employing an alternative tax avoidance measure developed by Henry and Sansing (2014). The authors measure addresses both sample selection bias and measurement error that exists when using income as the denominator when calculating effective tax rates. Using the Henry and Sansing (2014) measure of tax avoidance, we find that U.S. multinational corporations do have a tax-based cost advantage relative to their domestic counterparts. Thus, sample selection bias is a plausible explanation for the unexpected tax-based cost advantage of US domestic firms reported in prior research.