03 Taxation (TAX)

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    The interactive effect of reward type and taxation on employee effort
    ( 2021) Bauer, Tim ; Deore, Aishwarrya ; Presslee, Adam ; Shaw, Joanna
    Firms are increasingly using performance-contingent tangible rewards (e.g., gift cards) to motivate employee effort. We use an experiment to examine whether the effort effects of tangible rewards versus cash rewards depend on whether the rewards are subject to taxation. Consistent with affective valuation theory, we find that the motivational disadvantage of tangible rewards versus cash rewards is greater when rewards are subject to taxation than when rewards are not subject to taxation. Specifically, while we find no difference in effort between the two reward types when rewards are not taxed, we find that participants exert more effort to earn cash rewards than tangible rewards when rewards are taxed. Our study informs compensation designers of the greater adverse effects of taxation on tangible relative to cash rewards, which highlights the usefulness of techniques such as ‘grossing up’ tangible rewards or using cash- tangible reward combinations to mitigate the negative effects of taxation on tangible rewards.
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    The Effect of Politician Stock Ownership on Corporate Tax Strategy
    ( 2021) Harding, Michelle ; Kim, Jonghwan Simon ; Koo, Kwangjoo ; Paz, Michael
    We examine the relation between politician stock ownership and corporate tax strategy. Specifically, we examine whether politicians’ direct stock ownership as a measure of politician-initiated corporate political connections (CPC) is associated with companies’ tax aggressiveness. Using hand-collected data on U.S. politicians’ stock ownership, we find that companies’ tax aggressiveness is not affected by the incidence of politician stock ownership. This contrasts with prior research on tax aggressiveness when political connections are directly initiated by the company. However, we find that the concentration of politician stockholders within a company is strongly associated with tax aggressiveness. This evidence suggests that companies engage in more aggressive tax strategies when they anticipate lower expected costs stemming from a critical mass of politician stock owners. We also find increased tax aggressiveness when politician stockholders have more legislative influence, stronger alignment of economic interests with the company, or when the company is headquartered in the politician’s home state. Moreover, politician-induced tax aggressiveness is incremental to the tax avoidance associated with company-initiated CPC gained through corporate campaign contributions. Taken together, our evidence suggests that concentrated politician stock ownership plays an important role in determining companies’ tax strategies and that this mechanism is incremental to other forms of corporate political connections.
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    Foreign Aid through Domestic Tax Cuts? Evidence from Multinational Firm Presence in Developing Countries
    ( 2021) Olbert, Marcel ; Klein, Daniel ; Hoopes, Jeffrey ; Lester, Rebecca
    This paper studies how corporate tax cuts in developed countries affect economies in the developing world. We focus on one of the most prominent fiscal policies – the corporate income tax regime – and study a major U.K. tax cut as an exogenous shock to foreign investment in Africa. Difference-in-differences estimates show that multinational U.K. firms increase their subsidiary presence in sub-Saharan Africa by 12-24% following the U.K. tax rate reduction after 2009. Exploiting location-specific nighttime luminosity as well as local African survey data from the African Demographic and Health Surveys, we document that these increases in U.K. subsidiary presence are also associated with increased economic activity and higher employment rates of African citizens within close proximity (10km) of local U.K.-owned subsidiaries. Our findings imply that, beyond the goal of motivating home country investment, developed countries’ corporate tax cuts are a channel for economic impact in developing countries.
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    Do U.S. Tax Court Judge Attributes Affect Corporate Tax Dispute Outcomes?
    ( 2021) Moser, William ; Lindsey, Brad ; McDonnell, Sophie
    Corporate taxpayers can have economically meaningful disputes with the IRS that ultimately involve the federal judiciary. In an attempt to reduce the number of corporate tax disputes going to trial and reduce the amount of time between when corporate taxpayers file a petition with the U.S. Tax Court and resolution of the case, politicians and judges have placed greater emphasis on negotiated settlements as opposed to Tax Court trials. In this paper, we investigate whether the personal attributes of the Tax Court judge assigned to the case (political ideology, professional experience, and tenure on the bench) influence corporate taxpayers and the IRS to reach a negotiated settlement or to proceed to trial. Overall, our results show that Tax Court judges who are conservative, have private practice experience, have governmental legislative experience, and have longer tenure on the Tax Court bench are more likely to preside over disputes resolved through a negotiated settlement as opposed to going to a trial.
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    When Are Effective Tax Rate Decreases Persistent? The Role of Incentives and Tax-Specific Experience
    ( 2021) Beardsley, Erik ; Kara, Mehmet ; Weaver, Connie
    This study examines the role of executives’ tax-specific experience and incentives on the persistence of effective tax rate (ETR) decreases. Prior studies typically attribute ETR decreases to either earnings management or tax planning. However, the method used to reduce ETRs can have a significant effect on the persistence of the change, which is important for forecasting future earnings and assessing valuation. We find that, on average, tax-specific experience is associated with more persistent ETR decreases, consistent with tax planning. However, tax-specific experience is also associated with more ETR earnings management, which is associated with less persistent ETR decreases. Importantly, tax-specific experience is not associated with more persistent ETR decreases when the decrease is used to manage earnings. Overall, we document that both tax-related experience and incentives have a significant effect on the persistence of ETR reductions, and the effect of tax-related experience depends on whether the ETR reduction was used to manage earnings. This study has important implications regarding financial reporting quality, forecasting, and firm valuation.