Abstract :
[en] We develop a linear corporate tax function where taxes paid are regressed on pre-tax income and an intercept. We show that if the intercept is positive, cash ETRs are a convex function of pre-tax income. We present large-sample evidence consistent with this ETR convexity. Thus, although firms may have stable linear tax functions (i.e., constant parameters in the linear tax model) representing stable tax avoidance behavior, ETRs can change over time because of growth in pre-tax income. Consequently, simply examining changes (or differences) in cash ETRs is nondiagnostic about whether tax avoidance has changed over time (or differs across firms). We illustrate our argument by showing that all of the observed downward trend in cash ETRs documented by Dyreng et al. (2017) can be explained by growth in pre-tax income. The wholesale concern about increased tax avoidance over time might be overstated.
Funding text :
We appreciate helpful comments and suggestions from two anonymous referees, Mark Bagnoli, Scott Dyreng, David Guenther, Michelle Hutchens, Martin Jacob (discussant), Saskia Kohlhase, Lillian F. Mills (editor), Jake Thornock (discussant) Ryan Wilson, Wuyang Zhao, and seminar participants at the University of Oregon, Purdue University, Erasmus University Rotterdam, the 7th European Institute for Advanced Studies in Management Conference on Current Research in Taxation, the Tax Reading Group at the University of California, Irvine, the 2017 Canadian Academic Accounting Association Annual Conference, and the 2018 Journal of the American Taxation Association Conference. We gratefully acknowledge financial support from the Rotman School of Management, the IESEG School of Management, the University of Münster, the University of California, Irvine, and the Social Sciences and Humanities Research Council of Canada.
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