04 Taxation (TAX)

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    The Impact of the “Grain Glitch Fix” on Specialized Cooperatives
    ( 2022) Terando, William
    This paper examines the influence of the tax rule changes associated with the Tax Cuts and Jobs Act of 2017 (“TCJA 2017”) and the Consolidated Appropriations Act of 2018 (“2018 Act”) fix to the Grain Glitch on the financing decisions and after-tax cash flows of Specified Cooperatives and their patrons. I show Specialized Coops have incentive pass-down their Section 199A(g) deduction to eligible patrons to increase their after-tax cash flows. I also show that, depending on the situation, Specialized Coops will have incentive to issue qualified or non-qualified distributions to their patrons in the form or stock to increase their own level allocated equity as well as to provide their patrons future cash flow flexibility. Finally, I suggest that the ability of Exempt Coops to take the Section 199A(g) deduction on non-patronage income may increase their incentive to organize as a Section 521 Exempt Specialized Coop.
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    The Impact of Audit Rate and Participant Pay Structure on Decision Making in Experimental Research
    ( 2022) Hageman, Amy ; Schwebke, Jason ; West, Ashley
    Researchers often make careful and intentional experimental design choices about items other than just independent variables. However, these non-focal design choices may also have an impact on participant decision-making. First, we conduct a comprehensive review of design choices made in tax experiments published over the last 31 years. Then, we investigate whether and how the experimental design choices of (1) audit rate and (2) participant pay structure influence decision making in an experimental research setting. We utilize a 5 (audit rate: unstated, stated at 10 percent, stated at 30 percent, stated at 40 percent, or stated at 55 percent) by 2 (pay structure: flat or incentive) experimental design. Based on expected utility theory, we predict and find that taxpayer compliance is higher under a stated experimental audit rate (as opposed to an unstated audit rate), increases as the experimental audit rate increases, and is higher under a flat pay structure (compared to an incentive-based pay structure). This study has important implications for behavioral researchers when making experimental design choices.
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    Why do loss firms pay taxes?
    ( 2022) Edwards, Alexander ; Kubata, Adrian ; Shevlin, Terry
    In a broad sample of publicly traded firms over the period 1988−2017, we observe that the share of firms reporting pre-tax losses increased from about 20 to 35%. Of those loss firms, on average 68% have positive cash tax payments (tax-paying loss firms). The amount of taxes paid by these loss firms is substantial and increasing over time. This study seeks to understand this prevalence of tax-paying loss firms. We investigate the determinants of why loss firms pay taxes. We find that book-tax income reporting differences, firms’ multinational vs. domestic status, the occurrence of foreign profits/losses in total losses, different sources of income such as ordinary income vs. capital gains, as well as, special items, firms’ tax loss carry back potential and firm size are important determinants of why loss firms are paying taxes. These variables also are associated with the magnitude of the taxes paid.
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    Investor Reactions to a Voluntary Tax-related Sustainability Reporting Standard: Evidence from GRI 207: Tax
    ( 2022) Inger, Kerry ; Hardeck, Inga ; Moore, Rebekah ; Hohlwegler, Olivia
    We investigate the capital market reaction to events leading up to the introduction of the first standard for tax-related sustainability reporting, Global Reporting Initiative (GRI) 207. GRI is the dominant standard for sustainability reporting, which is voluntarily adopted by GRI reporting firms. Utilizing event study methodology, we document significant negative average cumulative abnormal returns (CAR) surrounding GRI 207 introduction events for a sample of GRI-reporting firms. We interpret this result as evidence that investors perceive the costs of tax transparency under the new standard to be greater than the benefits. Cross-sectional results suggest investors perceive that GRI 207 provides new information beyond existing country-by-country reporting requirements and that costs will be higher when tax is a material topic. Qualitative interviews supplement our empirical analyses and provide context for our results.
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    Tax-Loss Harvesting with Cryptocurrencies
    ( 2022) Rabetti, Daniel ; Cong, Lin William ; Landsman, Wayne ; Maydew, Edward
    This study describes the landscape of taxation in the crypto markets concerning U.S. taxpayers, and examines how recent increases in tax scrutiny have lead to changes in trading behavior by crypto traders. Using a conceptual framework, we predict and find that increased tax scrutiny leads crypto investors to utilize legal tax planning with tax-loss harvesting as an alternative to non-compliance. In particular, domestic traders increase compliance and tax-loss harvesting following the increase in tax scrutiny, and U.S. exchanges exhibit a significantly greater amount of wash trading. Additional findings suggest that broad-based and targeted changes in tax scrutiny can differentially affect crypto traders’ preference for U.S.-based exchanges. We discuss new gray areas for tax regulation relating to new crypto assets such as Non-Fungible Tokens and Decentralized Finance protocols that highlight the importance of the coordination between tax policy and other regulations.
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    Investor Reactions to Treasury Regulations: The case of GILTI
    ( 2022) Marino, Amanda ; Watson, Luke
    We examine the firm value effects of Treasury regulations. Prior research has largely overlooked this powerful source of tax law. We employ Treasury regulations related to IRC §951A, the global intangible low-taxed income (GILTI) provisions, as a setting that is relatively identifiable and impacts many firms. In passing the GILTI provisions, Congress intended to reduce profit shifting and increase the taxable foreign-sourced income of U.S. multinational companies (MNCs). Congress has increasingly relied on Treasury in their interpretation of tax policy, but it was unclear what impact this source of regulatory power might have. We find significant market reactions around the issuance of Treasury regulations related to the GILTI provisions. We also find that these reactions are somewhat predictable in direction. Our cross-sectional tests show that market reactions to Treasury regulations vary logically according to certain firm characteristics. The study broadens our understanding of how executive power shapes tax policy by examining how shareholders react to Treasury regulations.
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    Tax Avoidance of Loss Firms
    ( 2022) Schwab, Casey ; Stomberg, Bridget ; Xia, Junwei
    This study examines the nature of tax avoidance among loss firms. Using the methodology in Schwab, Stomberg, and Xia (2022) to identify and classify deliberate and intentional tax avoidance activities from companies’ effective tax rate reconciliations, we find that approximately 35 percent of loss firms engage in some form of intentional and deliberate tax avoidance. Among those firms, the average magnitude of the related tax benefits is approximately nine percent of pretax income. The most frequent and material forms of tax avoidance among loss firms are claiming tax credits and taking advantage of tax opportunities associated with foreign operations. We also predict and find a positive relation between firms’ expected future tax benefits from tax avoidance and the magnitude of such activities. This positive relation is increasing in the ability of the firm’s management team. Our study provides the first detailed examination into the nature of loss firms’ tax avoidance activities.
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    U.S. Import Tariffs and Domestic Corporate Performance
    ( 2022) Froymovich, Shiran ; Konchitchki, Yaniv
    This paper provides a systematic inquiry into how imposing import tariffs by the U.S. government affects the accounting performance, investment activities, and valuation of U.S. domestic firms. It shows that, subsequent to U.S. imposing tariffs, domestic firms experience improved profitability, capital expenditure, total investment, and valuation. Although imposing tariffs leads to both higher revenue and cost, the increased revenue outweighs the increased costs stemming from the imposed tariffs, resulting in a net positive effect on profitability. Additional analyses show that firms in highly competitive markets, low-growth firms, less innovative firms, financially distressed firms, and small firms benefit more from the imposed tariffs. Collectively, this paper shows that U.S. domestic firms benefit from import tariffs imposed by the U.S. government.
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    A Crafty Rabbit Has Three Burrows: Strategic Response to Tax Enforcement in Business Groups
    ( 2022) You, Jiaxing ; Wei, Shanshan ; Xia, Jingjing
    This paper examines the strategic reactions of business groups—a prevalent organizational structure—to tax enforcement programs. Exploiting the quasi-experimental variation in regional exposures to tax enforcement generated by the Golden Tax Project III (GTP) in China and the unique feature of the Chinese tax regime that requires subsidiaries to file taxes on a stand-alone basis, we find that the implementation of GTP in the city where a parent firm is located prompts it to increase tax avoidance of the subsidiaries unaffected by GTP using proprietary tax return data. Consistent with theory, the increase in subsidiary tax avoidance is stronger when the subsidiary receives lower tax scrutiny, when the subsidiary and the parent are more financially constrained, and when parent executives have a weaker sense of civic duty towards the subsidiary’s city. These findings suggest that a firm’s exposure to tax enforcement can be affected by its organizational structure.
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    The Influence of Tax Auditors' Emotions on Tax Audit Negotiations and Tax Compliance
    ( 2022) Blaufus, Kay ; Gronewold, Ulfert ; Kirchner, Jan-Robert
    We study the effects of tax auditors' emotion expressions during tax audit negotiations. A first experiment shows that auditors expressing anger obtain more concessions from taxpayers than auditors expressing happiness. Thus, taxpayers interpret auditors' emotions strategically and do not respond affectively. A second experiment shows that the experience with an auditor who expressed either happiness or anger reduces taxpayers' post-audit compliance compared to the experience with an emotionally neutral auditor. Apparently, taxpayers use their experience with an emotional auditor to rationalize subsequent non-compliance. Overall, our findings demonstrate potentially detrimental effects of auditors' positive and negative emotion expressions and point to the benefits of avoiding emotion expressions: avoiding them does not result in fewer concessions from taxpayers than expressing anger, leads to a better evaluation of the relationship, and reduces taxpayers' post-audit non-compliance.