On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act (TCJA), the most sweeping revision of US tax law since the Tax Reform Act of 1986. The law introduced many significant ...changes. However, perhaps none was as important as the changes in the treatment of traditional “C” corporations—those corporations subject to a separate corporate income tax. Beginning in 2018, the federal corporate tax rate fell from 35 percent to 21 percent, some investment qualified for immediate deduction as an expense, and multinational corporations faced a substantially modified treatment of their activities. This paper seeks to evaluate the impact of the Tax Cuts and Jobs Act to understand its effects on resource allocation and distribution. It compares US corporate tax rates to other countries before the 2017 tax law, and describes ways in which the US corporate sector has evolved that are especially relevant to tax policy. The discussion then turns the main changes of the Tax Cuts and Jobs Act of 2017 for the corporate income tax. A range of estimates suggests that the law is likely to contribute to increased US capital investment and, through that, an increase in US wages. The magnitude of these increases is extremely difficult to predict. Indeed, the public debate about the benefits of the new corporate tax provisions enacted (and the alternatives not adopted) has highlighted the limitations of standard approaches in distributional analysis to assigning corporate tax burdens.
We examine whether three tax system characteristics—required book-tax conformity, worldwide versus territorial approach, and perceived strength of enforcement—impact corporate tax avoidance across ...countries after controlling for firm-specific factors previously shown to be associated with tax avoidance (i.e., performance, size, operating costs, leverage, growth, the presence of multinational operations, and industry) and for other cross-country factors (i.e., statutory corporate tax rates, earnings volatility, and institutional factors). We find that, on average, firms avoid taxes less when required book-tax conformity is higher, a worldwide approach is used, and tax enforcement is perceived to be stronger. However, the relations between tax avoidance and all three tax systems characteristics are contextual and depend on the extent to which management compensation comes from variable pay, including bonuses, stock awards, and stock options.
We investigate systematic changes in corporate effective tax rates over the past 25 years and find that effective tax rates have decreased significantly. Contrary to conventional wisdom, the decline ...in effective tax rates is not concentrated in multinational firms; effective tax rates have declined at approximately the same rate for both multinational and domestic firms. Moreover, within multinational firms, both foreign and domestic effective rates have decreased. Finally, changes in firm characteristics and declining foreign statutory tax rates explain little of the overall decrease in effective rates.
Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms contributed to widespread VAT adoption worldwide, but there is surprisingly little evidence. ...This paper analyzes the role of third-party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. This leads to strong enforcement spillovers up the VAT chain. These findings confirm that when taking evasion into account, significant differences emerge between otherwise equivalent forms of taxation.
We investigate the relation between changes in tax composition and long-run economic growth using a new dataset covering a broad cross-section of countries with different income levels. We ...specifically consider 69 countries with at least 20 years of observations on total tax revenue during the period 1970-200921 high-income, 23 middle-income and 25 low-income countries. To our knowledge this is the most comprehensive and up-to-date dataset on tax composition and growth. We find that increasing income taxes while reducing consumption and property taxes is associated with slower growth over the long run. We also find that: (1) among income taxes, social security contributions and personal income taxes have a stronger negative association with growth than corporate income taxes; (2) a shift from income taxes to property taxes has a strong positive association with growth; and (3) a reduction in income taxes while increasing value added and sales taxes is also associated with faster growth.
We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms ...undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly two percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques.
Reducing tax evasion is a priority for many governments. A growing literature argues that verifying taxpayer reports against third-party information is critical for tax collection. However, ...effectiveness can be limited when tax authorities face constraints to credible enforcement and taxpayers make offsetting adjustments on other margins. We exploit a policy intervention in which Ecuadorian firms were notified about detected revenue discrepancies. Most firms simply failed to respond. Firms that responded increased reported revenue, matching the discrepancy amount when provided. However, they also increased reported costs by 96 cents per dollar of revenue adjustment, resulting in minor increases in tax collection.
This study investigates whether the tax-specific industry expertise of the external audit firm influences its clients' level of tax avoidance. Our results suggest that clients purchasing tax services ...from their external audit firm engage in greater tax avoidance when their external audit firm is a tax expert. Because the external audit firm potentially influences clients' tax avoidance activities via the provision of tax consulting services and the financial statement audit, we also examine whether the overall expertise (i.e., the combined tax and audit expertise) of the external audit firm is associated with tax avoidance. We find that the external audit firm's overall expertise is generally associated with greater tax avoidance, which suggests that overall experts are able to combine their audit and tax expertise to develop tax strategies that benefit clients from both a tax and financial statement perspective. In combination, our results suggest that the tax-specific industry expertise of the external audit firm plays a significant role in its clients' tax avoidance.
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.
In this paper, I discuss the concepts of tax aggressiveness and tax risk from an academic point of view. Although tax aggressiveness is often defined as being in the "eye of the beholder," this is ...not terribly satisfactory when attempting to measure empirically tax planning aggressiveness and its associations with firm attributes. I explain that tax planning that results in certain tax benefits should not constitute aggressiveness. Although policy makers may argue that these tax planning opportunities are attributable to tax loopholes, this assertion does not imply that the firm has undertaken any significant risk by entering into such tax planning. By documenting that low effective tax rates are not necessarily associated with risky or uncertain tax planning, I hope to convince future researchers to develop better empirical proxies for capturing aggressive tax planning.
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