We examine how firms utilize cash generated via tax avoidance. Understanding how firms use these cash flows is important given the considerable global attention firms' tax avoidance activities have received. Using an international sample, we find that firms are more likely to invest cash tax savings or use them to repurchase shares rather than distribute them in the form of dividends. We find that our results hold for an international sample of domestic-only firms, distinguishing our study from U.S.-only studies, which focus on constraints and distortions of multinational corporations in a worldwide tax system. When partitioning on country-level governance, we find that firms in weak governance countries are more likely to use tax savings to fund investment and pay dividends. Taken together, our results suggest cash tax avoidance is associated with important firm decisions, and these associations vary across countries.
{"title":"How Do Firms Use Cash Tax Savings? A Cross-country Analysis","authors":"D. Green, Jon N. Kerr","doi":"10.2308/jata-19-027","DOIUrl":"https://doi.org/10.2308/jata-19-027","url":null,"abstract":"We examine how firms utilize cash generated via tax avoidance. Understanding how firms use these cash flows is important given the considerable global attention firms' tax avoidance activities have received. Using an international sample, we find that firms are more likely to invest cash tax savings or use them to repurchase shares rather than distribute them in the form of dividends. We find that our results hold for an international sample of domestic-only firms, distinguishing our study from U.S.-only studies, which focus on constraints and distortions of multinational corporations in a worldwide tax system. When partitioning on country-level governance, we find that firms in weak governance countries are more likely to use tax savings to fund investment and pay dividends. Taken together, our results suggest cash tax avoidance is associated with important firm decisions, and these associations vary across countries.","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2021-04-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46678045","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}
James A. Chyz, Ronen Gal-Or, Vic Naiker, D. Sharma
This study examines associations between auditor-provided tax compliance and tax planning services and tax avoidance and tax risk. Collectively, our results suggest that companies paying their auditors for tax planning advice are more effective tax planners (in terms of higher tax avoidance, and lower tax risk) than firms that do not engage their auditor for tax work. Our tax avoidance results are more pronounced for clients of auditors with more tax expertise and longer tenure as well as for firms with higher tax and operational complexity. We also find that our tax avoidance results hold only when firms also engage their auditors for tax compliance work, which is consistent with auditors seeking to minimize reputation threats. Our study's unique hand-collected panel dataset provides a more precise and nuanced perspective on the role auditors play in tax outcomes.
{"title":"The Association between Auditor Provided Tax Planning and Tax Compliance Services and Tax Avoidance and Tax Risk","authors":"James A. Chyz, Ronen Gal-Or, Vic Naiker, D. Sharma","doi":"10.2308/jata-19-041","DOIUrl":"https://doi.org/10.2308/jata-19-041","url":null,"abstract":"This study examines associations between auditor-provided tax compliance and tax planning services and tax avoidance and tax risk. Collectively, our results suggest that companies paying their auditors for tax planning advice are more effective tax planners (in terms of higher tax avoidance, and lower tax risk) than firms that do not engage their auditor for tax work. Our tax avoidance results are more pronounced for clients of auditors with more tax expertise and longer tenure as well as for firms with higher tax and operational complexity. We also find that our tax avoidance results hold only when firms also engage their auditors for tax compliance work, which is consistent with auditors seeking to minimize reputation threats. Our study's unique hand-collected panel dataset provides a more precise and nuanced perspective on the role auditors play in tax outcomes.","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2021-04-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44876196","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}
Bryan K. Church, Karie Davis-Nozemack, L. Dhooge, Shankar Venkataraman
The US Tax Code allows corporate defendants to treat punitive damages as a deductible expense. Legal scholars argue that tax-unaware jurors fail to recognize that deductibility significantly reduces defendants' after-tax punishment, leading to an under-punishment problem. They propose that explicitly informing jurors about tax-deductibility could mitigate this problem. We conduct an experiment to test this claim. Compared to a control group of jurors who are told nothing about taxes, jurors who learn about tax-deductibility award higher damages when the defendant's effective tax rate (ETR) is low, but not when ETR is high. Our results highlight the cost of tax avoidance (low ETRs) for firms in a previously unexamined setting. Our findings suggest that allowing jurors to consider tax-deductibility leads to higher damages only under a narrow set of circumstances, offering limited support for the under-punishment hypothesis. Our results should be of interest to scholars in accounting, law, and public policy.
{"title":"The Impact of Juror Knowledge of Deductibility and Defendants' Tax Rates on Punitive Damages Awards: Experimental Evidence","authors":"Bryan K. Church, Karie Davis-Nozemack, L. Dhooge, Shankar Venkataraman","doi":"10.2308/JATA-19-007","DOIUrl":"https://doi.org/10.2308/JATA-19-007","url":null,"abstract":"The US Tax Code allows corporate defendants to treat punitive damages as a deductible expense. Legal scholars argue that tax-unaware jurors fail to recognize that deductibility significantly reduces defendants' after-tax punishment, leading to an under-punishment problem. They propose that explicitly informing jurors about tax-deductibility could mitigate this problem. We conduct an experiment to test this claim. Compared to a control group of jurors who are told nothing about taxes, jurors who learn about tax-deductibility award higher damages when the defendant's effective tax rate (ETR) is low, but not when ETR is high. Our results highlight the cost of tax avoidance (low ETRs) for firms in a previously unexamined setting. Our findings suggest that allowing jurors to consider tax-deductibility leads to higher damages only under a narrow set of circumstances, offering limited support for the under-punishment hypothesis. Our results should be of interest to scholars in accounting, law, and public policy.","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2021-03-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48819987","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}
State and local governments depend heavily on revenue generated from state and local taxes (SALTs). Migration between states occurs for many non-tax reasons, but prior research suggests tax-related...
{"title":"SALTy Citizens: Which State and Local Taxes Contribute to State-to-State Migration?","authors":"Amy M. Hageman, Sean W.G. Robb, J. Schwebke","doi":"10.2308/jata-19-020","DOIUrl":"https://doi.org/10.2308/jata-19-020","url":null,"abstract":"State and local governments depend heavily on revenue generated from state and local taxes (SALTs). Migration between states occurs for many non-tax reasons, but prior research suggests tax-related...","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2021-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46453328","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}
Tax preparer regulation is a controversial topic among policymakers, the Internal Revenue Service, and certification providers. Proponents claim that regulation protects taxpayers from incompetent preparers, while opponents assert that regulation increases costs and discourages preparers from attaining higher qualifications. Following longstanding regulations in Oregon and California, the IRS implemented the Registered Tax Return Preparer program in 2012, which was unexpectedly invalidated in just its second year. Using this quasi-experimental setting and a unique dataset of all U.S. tax preparers obtained from the IRS, we test the effect of regulation on tax preparer qualifications. We find that tax preparer regulation is positively associated with the proportion of highly qualified tax preparers. We also find that regulation increases (decreases) the likelihood that a market entrant (exiter) is highly qualified. In additional analysis, we find some evidence that tax preparer regulations are associated with increased fees and better tax return quality. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: H29; J44; M40.
{"title":"Regulation and Tax Preparer Qualifications","authors":"Matthew Reidenbach, Trevor L. Sorensen, J. Treu","doi":"10.2308/jata-18-002","DOIUrl":"https://doi.org/10.2308/jata-18-002","url":null,"abstract":"\u0000 Tax preparer regulation is a controversial topic among policymakers, the Internal Revenue Service, and certification providers. Proponents claim that regulation protects taxpayers from incompetent preparers, while opponents assert that regulation increases costs and discourages preparers from attaining higher qualifications. Following longstanding regulations in Oregon and California, the IRS implemented the Registered Tax Return Preparer program in 2012, which was unexpectedly invalidated in just its second year. Using this quasi-experimental setting and a unique dataset of all U.S. tax preparers obtained from the IRS, we test the effect of regulation on tax preparer qualifications. We find that tax preparer regulation is positively associated with the proportion of highly qualified tax preparers. We also find that regulation increases (decreases) the likelihood that a market entrant (exiter) is highly qualified. In additional analysis, we find some evidence that tax preparer regulations are associated with increased fees and better tax return quality.\u0000 Data Availability: Data are available from the public sources cited in the text.\u0000 JEL Classifications: H29; J44; M40.","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2021-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47089536","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}
Recent research by Dyreng et al (2014) finds that the effective tax rates for both foreign and domestic firms have been steadily decreasing over recent decades and that multinational firms (MNEs) do not have a tax-based cost advantage relative to their domestic counterparts. This paper extends this research and examines implicit taxes for MNEs. We use the approach outlined by Jennings et al. (2012) and find that for both domestic and multinational firms, lower effective tax rates are only partially offset by implicit taxes. Further, we find that implicit taxes for MNEs are lower than domestic firms and have fallen over time, while implicit taxes on domestic firms have been rising. We also find that differences in implicit taxes between domestic and MNE firms widen when MNE firms derive a larger portion of their pretax income from foreign sources. Our results underscore the contention in Shackelford and Shevlin (2001) that measuring differences in explicit tax burdens without implicit taxes may lead to incomplete findings.
{"title":"Implicit Taxes of U.S. Domestic and Multinational Firms During the Past Quarter-Century","authors":"James A. Chyz, LeAnn Luna, Hannah Smith","doi":"10.2308/JATA-19-018","DOIUrl":"https://doi.org/10.2308/JATA-19-018","url":null,"abstract":"Recent research by Dyreng et al (2014) finds that the effective tax rates for both foreign and domestic firms have been steadily decreasing over recent decades and that multinational firms (MNEs) do not have a tax-based cost advantage relative to their domestic counterparts. This paper extends this research and examines implicit taxes for MNEs. We use the approach outlined by Jennings et al. (2012) and find that for both domestic and multinational firms, lower effective tax rates are only partially offset by implicit taxes. Further, we find that implicit taxes for MNEs are lower than domestic firms and have fallen over time, while implicit taxes on domestic firms have been rising. We also find that differences in implicit taxes between domestic and MNE firms widen when MNE firms derive a larger portion of their pretax income from foreign sources. Our results underscore the contention in Shackelford and Shevlin (2001) that measuring differences in explicit tax burdens without implicit taxes may lead to incomplete findings.","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2021-01-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41568954","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 the effect of the reviewer role on tax professionals' advocacy bias. Prior research establishes the prevalence of advocacy bias and focuses on whether reviewers can detect preparers' advocacy bias; however, this study examines whether the reviewer role influences tax professionals' judgment and decision-making processes. In an experiment randomly assigning 75 tax professionals to the reviewer and preparer roles, I find professionals who occupy the reviewer role report similar advocacy attitudes to preparers but are significantly less likely to exhibit advocacy bias than preparers. Reviewers also employ a more consistent decision process than those in a preparer role. Results highlight the reviewer role as a moderator of advocacy bias, demonstrating the importance of the reviewer role for firms and clients. Understanding the effects of review responsibilities on professionals at all levels is increasingly important as firms leverage emerging technology to complete tasks traditionally assigned to less experienced professionals.
{"title":"Mitigating Advocacy Bias: The Effect of the Reviewer Role on Tax Professional Judgment","authors":"Mary E. Marshall","doi":"10.2308/JATA-18-060","DOIUrl":"https://doi.org/10.2308/JATA-18-060","url":null,"abstract":"This study examines the effect of the reviewer role on tax professionals' advocacy bias. Prior research establishes the prevalence of advocacy bias and focuses on whether reviewers can detect preparers' advocacy bias; however, this study examines whether the reviewer role influences tax professionals' judgment and decision-making processes. In an experiment randomly assigning 75 tax professionals to the reviewer and preparer roles, I find professionals who occupy the reviewer role report similar advocacy attitudes to preparers but are significantly less likely to exhibit advocacy bias than preparers. Reviewers also employ a more consistent decision process than those in a preparer role. Results highlight the reviewer role as a moderator of advocacy bias, demonstrating the importance of the reviewer role for firms and clients. Understanding the effects of review responsibilities on professionals at all levels is increasingly important as firms leverage emerging technology to complete tasks traditionally assigned to less experienced professionals.","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2021-01-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48568158","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}
Tax professionals commonly search large databases of information to identify tax authority necessary to provide compliance and planning advice to clients. Prior research indicates tax professionals' information search processes are subject to confirmation bias in the direction of client preferences and that this bias can lead professionals to make overly aggressive recommendations. However, very little is known about how time pressure may affect tax professionals' judgment and decision-making processes. This study contributes to practice and to the time pressure and decision bias literatures by providing theory and evidence that increasing time pressure leads to confirmation bias during tax information search and that time pressure enhanced confirmation bias affects recommendations through professionals' assessments of the evidential support for the client-preferred position. With an understanding of how time pressure can influence confirmation bias in information search, professionals and their firms can take steps to manage time pressure and its potential biasing effects.
{"title":"The Interactive Effect of Time Pressure and Client Preference on Tax Professionals' Information Search Emphasis, Judgments, and Recommendations","authors":"R. Ewing, Brian C. Spilker","doi":"10.2308/jata-19-048","DOIUrl":"https://doi.org/10.2308/jata-19-048","url":null,"abstract":"\u0000 Tax professionals commonly search large databases of information to identify tax authority necessary to provide compliance and planning advice to clients. Prior research indicates tax professionals' information search processes are subject to confirmation bias in the direction of client preferences and that this bias can lead professionals to make overly aggressive recommendations. However, very little is known about how time pressure may affect tax professionals' judgment and decision-making processes. This study contributes to practice and to the time pressure and decision bias literatures by providing theory and evidence that increasing time pressure leads to confirmation bias during tax information search and that time pressure enhanced confirmation bias affects recommendations through professionals' assessments of the evidential support for the client-preferred position. With an understanding of how time pressure can influence confirmation bias in information search, professionals and their firms can take steps to manage time pressure and its potential biasing effects.","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2021-01-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44725678","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}
Zero Deng, Fabio B. Gaertner, Dan Lynch, Logan B. Steele
We examine whether proprietary costs of disclosure affect the reporting of segment-level tax expense. Current accounting rules for segment-level reporting afford managers significant discretion in what line items to report. We predict and find firms with higher proprietary costs of disclosure (i.e., higher tax avoidance) are less likely to disclose segment-level tax information. These results are stronger for firms that define business segments on a geographic basis, where disclosure could reveal tax expense information about specific tax jurisdictions, consistent with the proprietary cost hypothesis. Overall, our results suggest some managers potentially use discretion in current guidance to avoid segment-level disclosure of taxes when these disclosures have the potential to be detrimental to the firm. JEL Classifications: H20; H25; M41.
{"title":"Proprietary Costs and the Reporting of Segment-Level Tax Expense","authors":"Zero Deng, Fabio B. Gaertner, Dan Lynch, Logan B. Steele","doi":"10.2308/jata-19-002","DOIUrl":"https://doi.org/10.2308/jata-19-002","url":null,"abstract":"\u0000 We examine whether proprietary costs of disclosure affect the reporting of segment-level tax expense. Current accounting rules for segment-level reporting afford managers significant discretion in what line items to report. We predict and find firms with higher proprietary costs of disclosure (i.e., higher tax avoidance) are less likely to disclose segment-level tax information. These results are stronger for firms that define business segments on a geographic basis, where disclosure could reveal tax expense information about specific tax jurisdictions, consistent with the proprietary cost hypothesis. Overall, our results suggest some managers potentially use discretion in current guidance to avoid segment-level disclosure of taxes when these disclosures have the potential to be detrimental to the firm.\u0000 JEL Classifications: H20; H25; M41.","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2020-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47672675","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}
Krull (2004) finds evidence that firms manage earnings through the permanently reinvested earnings designation using the backing-out methodology. However, Lim and Lustgarten (2002) demonstrate that...
{"title":"A Reexamination of Earnings Management through Permanently Reinvested Earnings","authors":"Mollie E. Mathis","doi":"10.2308/jata-18-009","DOIUrl":"https://doi.org/10.2308/jata-18-009","url":null,"abstract":"Krull (2004) finds evidence that firms manage earnings through the permanently reinvested earnings designation using the backing-out methodology. However, Lim and Lustgarten (2002) demonstrate that...","PeriodicalId":45477,"journal":{"name":"Journal of the American Taxation Association","volume":null,"pages":null},"PeriodicalIF":1.6,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44041964","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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