Friday, October 27, 2006
Tax papers at today's First Annual Conference on Empirical Legal Studies at Texas:
Labor income is the product of work hours and hourly earnings. The income tax, however, taxes labor income without distinguishing the contributions of these two factors. If one individual works twice as many hours as another, but at half the hourly wage, both individuals have the same labor income and, all else the same, pay the same tax. This paper studies the equity effects of this feature of the tax code. Using data from the University of Michigan's Panel Study of Income Dynamics, the paper finds that the tax code is generally more progressive in terms of “potential income” (average hourly earnings times workable hours) than in terms of “actual income” (average hourly earnings times hours actually worked). Yet, the paper also finds that this source of additional progressivity has eroded substantially over the last quarter century. This largely unrecognized change in income tax progressivity rivals in magnitude changes in progressivity due to several salient amendments to the tax code including reduced rates on capital income and the compression of the rate schedule.
Do corporate tax avoidance activities advance shareholder interests? This paper tests alternative theories of corporate tax avoidance that yield distinct predictions on the valuation of corporate tax avoidance. Unexplained differences between income reported to capital markets and to tax authorities are used to proxy for tax avoidance activity. These “book-tax” gaps are shown to be larger when firms are alleged to be involved in tax shelters. OLS estimates indicate that the average effect of tax avoidance on firm value is not significantly different from zero, but is positive for well-governed firms as predicted by an agency perspective on corporate tax avoidance. An exogenous change in tax regulations that affected the ability of some firms to avoid taxes is used to construct instruments for tax avoidance activity. The IV estimates yield larger overall effects and reinforce the basic result that higher quality firm governance leads to a larger effect of tax avoidance on firm value. The results are robust to a wide variety of tests for alternative explanations. Taken together, the results suggest that the simple view of corporate tax avoidance as a transfer of resources from the state to shareholders is incomplete given the agency problems characterizing shareholder-manager relations.