Vic Anand, Khrystyna Bochkay, Roman Chychyla, A. Leone
The prominence of textual data in accounting research has increased dramatically. To assist researchers in understanding and using textual data, this monograph defines and describes common measures of textual data and then demonstrates the collection and processing of textual data using the Python programming language. The monograph is replete with sample code that replicates textual analysis tasks from recent research papers.In the first part of the monograph, we provide guidance on getting started in Python. We first describe Anaconda, a distribution of Python that provides the requisite libraries for textual analysis, and its installation. We then introduce the Jupyter notebook, a programming environment that improves research workflows and promotes replicable research. Next, we teach the basics of Python programming and demonstrate the basics of working with tabular data in the Pandas package.The second part of the monograph focuses on specific textual analysis methods and techniques commonly used in accounting research. We first introduce regular expressions, a sophisticated language for finding patterns in text. We then show how to use regular expressions to extract specific parts from text. Next, we introduce the idea of transforming text data (unstructured data) into numerical measures representing variables of interest (structured data). Specifically, we introduce dictionary-based methods of 1) measuring document sentiment, 2) computing text complexity, 3) identifying forward-looking sentences and risk disclosures, 4) collecting informative numbers in text, and 5) computing the similarity of different pieces of text. For each of these tasks, we cite relevant papers and provide code snippets to implement the relevant metrics from these papers.Finally, the third part of the monograph focuses on automating the collection of textual data. We introduce web scraping and provide code for downloading filings from EDGAR.
{"title":"Using Python for Text Analysis in Accounting Research","authors":"Vic Anand, Khrystyna Bochkay, Roman Chychyla, A. Leone","doi":"10.1561/1400000062","DOIUrl":"https://doi.org/10.1561/1400000062","url":null,"abstract":"The prominence of textual data in accounting research has increased dramatically. To assist researchers in understanding and using textual data, this monograph defines and describes common measures of textual data and then demonstrates the collection and processing of textual data using the Python programming language. The monograph is replete with sample code that replicates textual analysis tasks from recent research papers.In the first part of the monograph, we provide guidance on getting started in Python. We first describe Anaconda, a distribution of Python that provides the requisite libraries for textual analysis, and its installation. We then introduce the Jupyter notebook, a programming environment that improves research workflows and promotes replicable research. Next, we teach the basics of Python programming and demonstrate the basics of working with tabular data in the Pandas package.The second part of the monograph focuses on specific textual analysis methods and techniques commonly used in accounting research. We first introduce regular expressions, a sophisticated language for finding patterns in text. We then show how to use regular expressions to extract specific parts from text. Next, we introduce the idea of transforming text data (unstructured data) into numerical measures representing variables of interest (structured data). Specifically, we introduce dictionary-based methods of 1) measuring document sentiment, 2) computing text complexity, 3) identifying forward-looking sentences and risk disclosures, 4) collecting informative numbers in text, and 5) computing the similarity of different pieces of text. For each of these tasks, we cite relevant papers and provide code snippets to implement the relevant metrics from these papers.Finally, the third part of the monograph focuses on automating the collection of textual data. We introduce web scraping and provide code for downloading filings from EDGAR.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"142 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-09-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87877317","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Hybrid mismatches are differences in tax rules between countries. It has been one of the main tools for multinationals to minimize their tax liabilities. As such, it has been a subject of concern for many legislators, international tax scholarship, and countries worldwide and evoked intriguing intellectual discussions on their legitimacy and how to address them. Indeed, this issue encompasses many complex issues, including the differences between accounting for the legal and economic situations of taxpayers, corporate and individual taxpayers, international tax and international law, distinguishing different types of income and more. These considerations are taken into account to address the conflict between the jurisdictions’ freedom to tax their subjects as they wish and their fight against base erosion and tax competition to ensure their ability to redistribute wealth in their societies. The recently enacted hybrid rules were designed to disallow deductions from payments of interest, royalties, and dividends by or from foreign related parties if such related parties are not already taxed for these payments. The legislative intent, structure of these sections, and the similarities between the first OECD’s Base Erosion and Profit Shifting show that these sections are international customary law. As such, this paper seeks to analyze and improve the current law by leaning on international tax principles and recent international tax trends, and argues that a BEAT-like minimum tax approach to these hybrid payments would apply the international tax principles substantially and coherently better as it prevents double non-taxation as well as de-minimis taxation and over taxation. In addition, this approach may reduce the complexity of the current law.
{"title":"Section 267a and the Taxation of Hybrid Mismatches Under the Code","authors":"S. Moyal","doi":"10.2139/ssrn.3690149","DOIUrl":"https://doi.org/10.2139/ssrn.3690149","url":null,"abstract":"Hybrid mismatches are differences in tax rules between countries. It has been one of the main tools for multinationals to minimize their tax liabilities. As such, it has been a subject of concern for many legislators, international tax scholarship, and countries worldwide and evoked intriguing intellectual discussions on their legitimacy and how to address them. Indeed, this issue encompasses many complex issues, including the differences between accounting for the legal and economic situations of taxpayers, corporate and individual taxpayers, international tax and international law, distinguishing different types of income and more. These considerations are taken into account to address the conflict between the jurisdictions’ freedom to tax their subjects as they wish and their fight against base erosion and tax competition to ensure their ability to redistribute wealth in their societies. The recently enacted hybrid rules were designed to disallow deductions from payments of interest, royalties, and dividends by or from foreign related parties if such related parties are not already taxed for these payments. The legislative intent, structure of these sections, and the similarities between the first OECD’s Base Erosion and Profit Shifting show that these sections are international customary law. As such, this paper seeks to analyze and improve the current law by leaning on international tax principles and recent international tax trends, and argues that a BEAT-like minimum tax approach to these hybrid payments would apply the international tax principles substantially and coherently better as it prevents double non-taxation as well as de-minimis taxation and over taxation. In addition, this approach may reduce the complexity of the current law.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"8 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78916351","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Each year, individual tax non-compliance causes billions of dollars of lost tax revenue. While the Internal Revenue Service (IRS) conducts examinations of select returns, the audit rate fell precipitously in past decades. Meanwhile, the number of individual returns grew and return complexity rose. Individuals face a dauntingly complex tax code that requires the assistance of paid preparers. More than ever, the IRS experiences greater demands for assistance from taxpayers but fewer resources to fulfill these demands. Instead of the oft-proposed IRS budget increase, we propose a simple and pragmatic, but transformative, solution: biennial filing and collection of taxes, which would minimize taxpayer and paperwork burdens, free up IRS funding, and result in a de facto doubling of the audit rate. In aggregate, the plan is estimated to save $74 – $83 billion for the IRS and the American public.
{"title":"Biennial Taxes – A Simple Solution to Rising Tax Non-Compliance, Shrinking IRS Budgets, and Increasing Taxpayer Burden","authors":"Jeffrey A. Dubin, Emma J Cockerell","doi":"10.2139/ssrn.3689246","DOIUrl":"https://doi.org/10.2139/ssrn.3689246","url":null,"abstract":"Each year, individual tax non-compliance causes billions of dollars of lost tax revenue. While the Internal Revenue Service (IRS) conducts examinations of select returns, the audit rate fell precipitously in past decades. Meanwhile, the number of individual returns grew and return complexity rose. Individuals face a dauntingly complex tax code that requires the assistance of paid preparers. More than ever, the IRS experiences greater demands for assistance from taxpayers but fewer resources to fulfill these demands. Instead of the oft-proposed IRS budget increase, we propose a simple and pragmatic, but transformative, solution: biennial filing and collection of taxes, which would minimize taxpayer and paperwork burdens, free up IRS funding, and result in a de facto doubling of the audit rate. In aggregate, the plan is estimated to save $74 – $83 billion for the IRS and the American public.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"16 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74622524","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Multinational corporations increasingly use royalty payments for intellectual property rights to shift profits globally. This threatens not only the tax base of countries worldwide, it also affects the nature of competition for foreign direct investment (FDI). Against this background, our theoretical analysis suggests a surprising solution to the problem of curbing profit shifting without suffering major FDI losses: A strictly positive withholding tax on royalty payments is both the Pareto-efficient solution under international coordination and the optimal unilateral response. If internal debt is sufficiently responsive, governments can even implement Paretooptimal targeting. Then, the royalty tax closes the profit-shifting channel, while all competition for FDI is relegated to internal-debt regulation. Our results question the ban of royalty taxes in double tax treaties and the EU Interest and Royalty Directive.
{"title":"Royalty Taxation under Profit Shifting and Competition for FDI","authors":"Steffen Juranek, Dirk Schindler, Andrea Schneider","doi":"10.2139/ssrn.3689736","DOIUrl":"https://doi.org/10.2139/ssrn.3689736","url":null,"abstract":"Multinational corporations increasingly use royalty payments for intellectual property rights to shift profits globally. This threatens not only the tax base of countries worldwide, it also affects the nature of competition for foreign direct investment (FDI). Against this background, our theoretical analysis suggests a surprising solution to the problem of curbing profit shifting without suffering major FDI losses: A strictly positive withholding tax on royalty payments is both the Pareto-efficient solution under international coordination and the optimal unilateral response. If internal debt is sufficiently responsive, governments can even implement Paretooptimal targeting. Then, the royalty tax closes the profit-shifting channel, while all competition for FDI is relegated to internal-debt regulation. Our results question the ban of royalty taxes in double tax treaties and the EU Interest and Royalty Directive.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"351 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76162396","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Eric J. Allen, D. O’Leary, Hao Qu, Charles W. Swenson
A growing literature, typically using “bags of words” dictionaries, examines the information content of text in financial accounting disclosures. We generate context for our text analysis to help predict effective tax rates using two approaches. First, we create tax-specific, expert-derived, dictionaries and, second, we generate the counts for those bags of words using text taken from tax-related discussions of the Form 10-K, as opposed to its entirety. We find that using expertise provides more information than simply using general accounting and finance dictionaries. In addition, we find that generating general accounting text variable values from tax-related content in the Form 10-K provides statistically significant improvement in model fit. Contrary to more generic accounting and finance word-based text analysis, we find that the signs on our positive and negative tax event dictionaries are different and are consistent with theoretical expectations through each of our modeled time periods.
{"title":"Tax Specific Versus Generic Accounting-Based Textual Analysis and the Relationship with Effective Tax Rates: Building Context","authors":"Eric J. Allen, D. O’Leary, Hao Qu, Charles W. Swenson","doi":"10.2139/ssrn.3684838","DOIUrl":"https://doi.org/10.2139/ssrn.3684838","url":null,"abstract":"\u0000 A growing literature, typically using “bags of words” dictionaries, examines the information content of text in financial accounting disclosures. We generate context for our text analysis to help predict effective tax rates using two approaches. First, we create tax-specific, expert-derived, dictionaries and, second, we generate the counts for those bags of words using text taken from tax-related discussions of the Form 10-K, as opposed to its entirety. We find that using expertise provides more information than simply using general accounting and finance dictionaries. In addition, we find that generating general accounting text variable values from tax-related content in the Form 10-K provides statistically significant improvement in model fit. Contrary to more generic accounting and finance word-based text analysis, we find that the signs on our positive and negative tax event dictionaries are different and are consistent with theoretical expectations through each of our modeled time periods.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"50 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87294486","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We review the empirical literature on the determinants and consequences of auditor-provided tax services (APTS) and provide some directions for future research. We first review the evolution of APTS fees disclosures and related regulations in select jurisdictions, followed by a summary of determinants of APTS. We review studies examining firms’ decisions (1) to disclose the APTS information voluntarily; (2) to choose incumbent auditors as the tax service providers; and (3) to retain or dismiss incumbent auditors as the tax service providers. Our review suggests that all these decisions are related to the cost-benefit trade-off. We then review the literature on the consequences of APTS. This strand of the literature in the U.S. supports the knowledge spillover effect, but the findings in the non-U.S. settings are mixed. The market perceptions of APTS in both the U.S. and non-U.S. settings suggest that market participants react to APTS negatively during uncertain periods.
{"title":"Determinants and Consequences of Auditor Provided Tax Services: A Systematic Review of the International Literature","authors":"Xuan (Sean) Sun, Ahsan Habib","doi":"10.2139/ssrn.3676856","DOIUrl":"https://doi.org/10.2139/ssrn.3676856","url":null,"abstract":"We review the empirical literature on the determinants and consequences of auditor-provided tax services (APTS) and provide some directions for future research. We first review the evolution of APTS fees disclosures and related regulations in select jurisdictions, followed by a summary of determinants of APTS. We review studies examining firms’ decisions (1) to disclose the APTS information voluntarily; (2) to choose incumbent auditors as the tax service providers; and (3) to retain or dismiss incumbent auditors as the tax service providers. Our review suggests that all these decisions are related to the cost-benefit trade-off. We then review the literature on the consequences of APTS. This strand of the literature in the U.S. supports the knowledge spillover effect, but the findings in the non-U.S. settings are mixed. The market perceptions of APTS in both the U.S. and non-U.S. settings suggest that market participants react to APTS negatively during uncertain periods.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"24 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88047141","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Christina M Lewellen, Landon M. Mauler, Luke Watson
While incorporating the firm’s parent company in a tax haven offers tax savings, it also imposes risks. We predict and find a higher cost of equity capital in firms with parent companies that are incorporated in tax havens. We find that the observed cost of equity premium is enhanced by tax risk, firm-level information risk, and country-level legal risk. We also employ corporate inversions in a difference-in-differences test and again find a positive relation between tax haven parent incorporation and the cost of capital. Our study contributes to the literatures on valuation of tax haven use, tax and nontax costs of corporate strategies, corporate inversions, and the relation between taxes and the cost of capital.
{"title":"Tax Haven Incorporation and the Cost of Capital","authors":"Christina M Lewellen, Landon M. Mauler, Luke Watson","doi":"10.2139/ssrn.3756367","DOIUrl":"https://doi.org/10.2139/ssrn.3756367","url":null,"abstract":"While incorporating the firm’s parent company in a tax haven offers tax savings, it also imposes risks. We predict and find a higher cost of equity capital in firms with parent companies that are incorporated in tax havens. We find that the observed cost of equity premium is enhanced by tax risk, firm-level information risk, and country-level legal risk. We also employ corporate inversions in a difference-in-differences test and again find a positive relation between tax haven parent incorporation and the cost of capital. Our study contributes to the literatures on valuation of tax haven use, tax and nontax costs of corporate strategies, corporate inversions, and the relation between taxes and the cost of capital.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"12 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88355423","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Though it is not the only cryptocurrency in circulation, Bitcoin has been one of the dominant and more highly valued digital currencies in the blockchain family. The IRS recently decided to treat Bitcoin and all other cryptocurrencies as property, thus causing ownership interests in these cryptocurrencies to generate a taxable transaction any time they are sold or traded for another good or service. We argue that taxation of cryptocurrencies and the recordkeeping necessities that come with it serve to inhibit the innovation in and growth of what could be an extremely valuable new commodity, the blockchain itself. We offer alternative strategies to mitigate the potential effects of these types of regulatory tax policies. Our work is the first to offer an analysis of the implications of tax policies on the development of blockchain technologies.
{"title":"Taxation as a Barrier to Blockchain Innovation","authors":"Michael D. Chatham, Thomas K. Duncan","doi":"10.2139/ssrn.3662619","DOIUrl":"https://doi.org/10.2139/ssrn.3662619","url":null,"abstract":"Though it is not the only cryptocurrency in circulation, Bitcoin has been one of the dominant and more highly valued digital currencies in the blockchain family. The IRS recently decided to treat Bitcoin and all other cryptocurrencies as property, thus causing ownership interests in these cryptocurrencies to generate a taxable transaction any time they are sold or traded for another good or service. We argue that taxation of cryptocurrencies and the recordkeeping necessities that come with it serve to inhibit the innovation in and growth of what could be an extremely valuable new commodity, the blockchain itself. We offer alternative strategies to mitigate the potential effects of these types of regulatory tax policies. Our work is the first to offer an analysis of the implications of tax policies on the development of blockchain technologies.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"24 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81193870","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines if financial reporting for income tax expense affects the timeliness of goodwill impairments. Goodwill impairments are an important signal of expected future cash flows, yet their timing is subject to managers’ discretion. U.S. GAAP requires that firms test all goodwill for impairment, but tax laws allow recognition and amortization of only some types of goodwill. Thus, financial statement tax benefits partially offset the impairment’s negative effect on GAAP net income only when the impairment includes tax-amortizable goodwill. Holding the size of impaired goodwill constant, we predict managers are more likely to delay impairments when the offsetting financial statement tax benefits are smaller. Results are consistent with expectations across a battery of tests. We estimate goodwill impairments are 17 to 22 percent more likely to be delayed when firms recognize reduced financial reporting income tax benefits. Our findings suggest financial reporting for taxes potentially distorts the timeliness of goodwill impairments.
{"title":"Does Financial Reporting for Income Tax Expense Affect the Timeliness of Goodwill Impairments?","authors":"Z. King, Dan Lynch, Bridget Stomberg, Steven Utke","doi":"10.2139/ssrn.3455659","DOIUrl":"https://doi.org/10.2139/ssrn.3455659","url":null,"abstract":"This study examines if financial reporting for income tax expense affects the timeliness of goodwill impairments. Goodwill impairments are an important signal of expected future cash flows, yet their timing is subject to managers’ discretion. U.S. GAAP requires that firms test all goodwill for impairment, but tax laws allow recognition and amortization of only some types of goodwill. Thus, financial statement tax benefits partially offset the impairment’s negative effect on GAAP net income only when the impairment includes tax-amortizable goodwill. Holding the size of impaired goodwill constant, we predict managers are more likely to delay impairments when the offsetting financial statement tax benefits are smaller. Results are consistent with expectations across a battery of tests. We estimate goodwill impairments are 17 to 22 percent more likely to be delayed when firms recognize reduced financial reporting income tax benefits. Our findings suggest financial reporting for taxes potentially distorts the timeliness of goodwill impairments.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"43 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74645136","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We identify a pecuniary externality arising from corporate tax avoidance. Firms share risk with the government via taxation. The lower the tax rate applied to a firm’s earnings, the more risk is borne by its shareholders. As more firms engage in avoidance in the aggregate, the variance of the market’s after-tax cash flow increases. Consequently, the covariance of a firm’s cash flow with the market cash flow, and thereby its cost of capital, increases. This occurs both for firms that avoid taxes and for those that do not. Consistent with our prediction, we find that firms’ implied cost of capital is positively related to aggregate corporate tax avoidance. This result holds not only for tax-avoiding but, crucially, also for non-tax-avoiding firms. As we predict, the pecuniary externality is stronger for firms whose cash flow covaries more with the market cash flow, and is driven by tax avoidance strategies that reduce a firm’s marginal tax rate as opposed to reducing its tax base.
{"title":"Aggregate Corporate Tax Avoidance and Cost of Capital","authors":"Stephanie A. Sikes, Robert E. Verrecchia","doi":"10.2139/ssrn.3662733","DOIUrl":"https://doi.org/10.2139/ssrn.3662733","url":null,"abstract":"We identify a pecuniary externality arising from corporate tax avoidance. Firms share risk with the government via taxation. The lower the tax rate applied to a firm’s earnings, the more risk is borne by its shareholders. As more firms engage in avoidance in the aggregate, the variance of the market’s after-tax cash flow increases. Consequently, the covariance of a firm’s cash flow with the market cash flow, and thereby its cost of capital, increases. This occurs both for firms that avoid taxes and for those that do not. Consistent with our prediction, we find that firms’ implied cost of capital is positively related to aggregate corporate tax avoidance. This result holds not only for tax-avoiding but, crucially, also for non-tax-avoiding firms. As we predict, the pecuniary externality is stronger for firms whose cash flow covaries more with the market cash flow, and is driven by tax avoidance strategies that reduce a firm’s marginal tax rate as opposed to reducing its tax base.","PeriodicalId":22313,"journal":{"name":"Tax eJournal","volume":"11 suppl_1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83839518","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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