TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, October 9, 2012

Incentives for Tax Planning and Avoidance

John R. Graham (Duke University, Fuqua School of Business), Michelle Hanlon (MIT, Sloan School of Management), Terry J. Shevlin (UC-Irvine) & Nemit Shroff (MIT, Sloan School of Management), Incentives for Tax Planning and Avoidance: Evidence from the Field :

We analyze survey responses from nearly 600 corporate tax executives to investigate firms’ incentives and disincentives for tax planning. While many researchers suspect that reputational concerns affect the degree to which managers engage in tax planning, this hypothesis is difficult to test with archival data because it is only possible to observe the firms that engage in tax planning and that get caught. Our survey allows us to investigate reputational influences and indeed we find that reputational concerns are important – 69% of executives rate reputation as important and the factor ranks second in order of importance among all factors explaining why firms do not adopt a potential tax planning strategy. We also find that financial accounting incentives play a role. For example, 84% of publicly traded firms respond that top management at their company cares at least as much about the GAAP ETR as they do about cash taxes paid and 57% of public firms say that increasing earnings per share is an important outcome from a tax planning strategy. Finally, we examine whether FIN 48 and SOX affected tax planning and relationships with auditors, as conjectured in prior research. Executive responses confirm these conjectures.

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