Douglas A. Shackelford

Empirical Tax Research in Accounting

This paper traces the development of archival, microeconomic-based, empirical income tax research in accounting over the last 15 years. The paper details three major areas of research: (i) the coordination of tax and non-tax factors, (ii) the effects of taxes on asset prices, and (iii) the taxation of multijurisdictional (international and interstate) commerce. Methodological concerns of particular interest to this field also are discussed. The paper concludes with a discussion of possible directions for future research. r 2001 Elsevier Science B.V. All rights reserved. JEL classification: M41; H25; K34; G32; F23

State and provincial corporate tax planning: income shifting and sales apportionment factor management

Abstract We empirically document a strategy through which corporations avoid state income taxes. Examining aggregated American state and Canadian provincial data from 1983–1991, we find corporate income tax revenues are concave in corporate tax rates, consistent with firms shifting their tax bases to more favourably taxed jurisdictions. Additional tests exploit unique features of state formula apportionment systems and find manufacturing shipments from states that tax outside their borders (throwback states) are decreasing in corporate income tax rates on sales.

Research in accounting for income taxes

This paper comprehensively reviews the Accounting for Income Taxes (AFIT) literature. We begin by identifying four distinctive aspects of AFIT and briefly covering the rules surrounding AFIT. We then review the existing studies in detail and offer suggestions for future research. We emphasize the research questions that have been addressed (most of which relate to whether the tax accounts are used to manage earnings and whether the tax accounts are priced by equity market participants). We also highlight areas that have not received much research attention and that warrant future analysis.

Foreign Tax Credit Limitations And Preferred Stock Issuances

This paper documents a consequence of a subset of tax law changes enacted in the Tax Reform Act of 1986 applicable to U.S. multinational corporations. Specifically, we provide evidence that the more stringent interest allocation rules and foreign tax credit limitations enacted in the 1986 Act resulted in the increased use of preferred stock as a financing instrument for U.S. multinationals. By decreasing the tax-favored status of debt for multinationals, Congress provided incentives for issuances of an alternative financing instrument, preferred stock. The cost of capital for multinational firms is a function of their total tax burden consisting of both domestic and foreign taxes. The United States taxes the worldwide income of U.S.-based multinational corporations. In addition, U.S. multinationals pay taxes in foreign jurisdictions based on the tax rules of the foreign governments. The U.S. mitigates, but does not eliminate, multiple taxation of foreign income

Capital Gains Taxes and Equity Trading: Empirical Evidence

Individual investors have an incentive to defer selling appreciated stock until it qualifies for tax-favored, long-term capital gains treatment. Shackelford and Verrecchia [2002] show that these incentives can affect equity trading around public disclosures. This article provides some empirical support for their theory with evidence of price increases and equity constrictions around announcements of quarterly earnings and additions to the S&P 500 index. We find share returns rise and trading volume falls with the incremental taxes saved by deferring the sale of appreciated property. The price increases, however, are temporary, reversing in subsequent trading days. The results are consistent with buyers believing the compensation to sell before long-term qualification (through higher prices) is less costly than holding an inappropriately weighted portfolio. This finding-that personal capital gains taxes affect equity trading-adds to a growing literature that challenges longstanding assumptions that firm value is independent of shareholders and their taxes. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2003.

Corporate domicile and average effective tax rates: The cases of Canada, Japan, the United Kingdom, and the United States

We use financial statement information to estimate three alterantive average effective tax rates for firms domiciled in Canada, Japan, the United Kingdom, and the United States during the period 1982 to 1991. While many of the firms we examine operate worldwide, we use the termdomicile to refer to the legal residence or site of incorporation of the parent company. Our objective is to determine themarginal impact of a companys domicile on its worldwide tax burden, with controls for industry and year. We find both among domestic-only companies and among multinational companies the domiciles are consistently ranked in descending order by average effective tax rates as Japan, the United Kingdom, the United States, and Canada. In comparing domestic-only companies and multinationals domiciled in the same jurisdiction, only U.S. multinationals consistently face a greater tax burden than their domestic counterparts.

The Changing Role of Auditors in Corporate Tax Planning

This paper examines changes in the role that auditors play in corporate tax planning following recent events, including the well-known accounting scandals, passage of the Sarbanes-Oxley Act, and regulatory actions by the SEC and PCAOB. On the whole, these events have increased the sensitivity to and scrutiny of auditor independence. We examine the effects of these events on the market for tax planning, in particular the longstanding link between audit and tax services. While the effects are recent, they are already being seen in the data. Specifically, there has already been a dramatic shift in the market for tax planning away from obtaining tax planning services from ones auditor. We estimate that the ratio of tax fees to audit fees paid to the auditors of firms in the S&P 500 decline from approximately one in 2001 to one-fourth in 2004. At the same time, we find no evidence of a general decline in spending for tax services. In sum, the evidence indicates a decoupling of the longstanding link between audit and tax services, such that firms are shifting their purchase of tax services away from their auditor and towards other providers.

Intertemporal Tax Discontinuities

We define an intertemporal tax discontinuity (ITD) as a circumstance in which different tax rates are applied to gains realized at one point in time versus some other point in time. We study the effects of ITDs on market behaviors at the time of disclosures of firm performance, assuming that all investors who trade firm equities are subject to tax. The results of our paper suggest that relative to an economy in which ITDs are absent, ITDs may dampen trading volume and amplify price changes at the time of disclosure.

Taxation Regulation and the Organizational Structure of Property-Casualty Insurers

This study investigates the effects of state taxes and regulation on an organizational structure decision for expanding property-casualty insurers (subsidiary versus license). Tests are conducted of the relation between the organizational structure of 2335 property-casualty insurers and state tax and regulatory conditions in 1991. Evidence is provided that property-casualty insurers structure their cross-state expansion to mitigate both state tax and regulatory costs.

The market for tax benefits: Evidence from leveraged ESOPs

Abstract This paper examines the competitiveness of the financial markets with respect to taxes. A unique set of interest rates from leveraged ESOPs enables precise measures of the effect of a debt subsidy on prices. I find that the market shifts most of the tax benefits to borrowers, indicative of an elastic supply curve for lenders. Lenders are compensated for incremental costs, such as reductions in tax rates and barriers to entry. Evidence is also presented that ESOP lenders are high taxpaying banks, suggesting the existence of a tax clientele.