TaxProf Blog

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

Friday, December 1, 2017

Weekly SSRN Tax Article Review And Roundup

This week, Erin Scharff (Arizona State) reviews a recent working paper by Scott Dyreng (Duke), Martin Jacob (WHU- Otto Beisheim School of Management), Xu Jiang (Duke), and Maximilian A. Müller (WHU- Otto Beisheim School of Management), Tax Avoidance and Tax Incidence:

Scharff (2017)I’m writing this week’s SSRN Update with my browser open, constantly refreshing newspaper websites.  I assume I’m not alone.  I feel grateful to so many members of the tax community who have spoken and written about the current tax reform proposals and attempted to shed light on the myriad of changes (and tax avoidance strategies) likely to be created by the tax bills working their way through Congress at lightning speed. 

So much of our focus in the past weeks has been understanding what’s in the proposed legislation, and I assume there will be much more to be learned and written should some version of the current proposals become law, as is looking increasingly likely (or maybe not, as more news breaks).

In the meantime, as we ponder the potential impact of large corporate tax cuts and new opportunities for tax avoidance, a new paper by Scott Dyreng, Martin Jacob, Xu Jiang, and Maximilian A. Müller offers new insight on corporate decision making.  Their findings suggest that for at least some firms, the ability to shift the tax incidence away from shareholders reduces the incentive to engage in tax avoidance.

Under the authors’ model, when the cost of capital is not fully tax-deductible, the relationship between corporate tax incidence and avoidance is ambiguous.  On the one hand, for firms able to pass the corporate tax on to workers, there is a reduced incentive to engage in avoidance.  On the other hand, firms with higher wage rates will have an incentive to invest more in capital, and because capital is not fully deductible, such firms may have greater incentives to engage in tax avoidance.  The authors then suggest that this model applies equally when market power allows firms to shift the tax incidence on to consumers.

Using existing data on concentration and similarity as proxies for market power, the authors then empirically test their model.  They find that firms with greater market power engage in less tax avoidance, as measured by cash ETR.  As their model predicts, this result is stronger for firms where capital is relatively more important in the production function.

Measuring comparative avoidance behavior of firms is not easy.  Though the authors employ a variety of techniques to test the accuracy of their empirical observations, including an alternate identification approach that relies on a triple deference design, there is likely further empirical work to be done to assess the relationship between incidence and avoidance.  

As the authors note, the role of tax incidence in tax avoidance may have important implications for the responsiveness of corporate decision-making to tax rate changes. and heterogeneity in firm tax avoidance also has implications for efforts to curb international tax avoidance. As a result, their findings and further research in this area should be of interest.

Here’s the rest of this week’s SSRN Tax Roundup:

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