Jeri K. Seidman

Deferred Tax Positions and Incentives for Corporate Behavior Around Corporate Tax Changes

A firms deferred tax position can influence how it is affected by a transition from one tax regime to another. We compile disaggregated deferred tax position data for a sample of large U.S. firms between 1993 and 2004 to explore how these positions might affect firm behavior before and after a pre-announced change in the statutory corporate tax rate. Our results suggest that the heterogeneous deferred tax positions of large U.S. corporations create substantial variation in the short-run effect of tax rate changes on reported earnings. Recognizing these divergent incentives is important for understanding the political economy of corporate tax reform.

Interpreting the Book-Tax Income Gap as Earnings Management or Tax Sheltering

The measured book-tax gap is often used as a surrogate for one of the behaviors that influences the gap - earnings management or tax sheltering - without adjusting for the effect of other influences - GAAP changes, tax law changes, and macroeconomic conditions. This paper provides evidence on the quality of the unadjusted book-tax income gap as a proxy for earnings management or tax sheltering by adjusting for the three measurable factors: GAAP changes, macroeconomic conditions, and earnings management. I find that changes in GAAP alone explain half of the pooled cross-sectional variation in the book-tax gap between 1993 and 2004, marking GAAP changes as an important recent influence on the book-tax gap. Also, replication results using unadjusted and adjusted book-tax gap measures suggest that the unadjusted book-tax gap is a reasonable proxy for earnings management, but that adjusting for the effect of GAAP changes generates a better proxy for tax sheltering in most contexts.

Conflicting Transfer Pricing Incentives and the Role of Coordination

Our study evaluates the role of coordination, at both the government- and the firm-level, on the transfer prices set by U.S. multinational corporations (MNCs) when income taxes and duties cannot be jointly minimized with a single transfer price. We find that either the presence of a coordinated income tax and customs enforcement regime or coordination between the income tax and customs functions alters transfer prices for these firms. Our analyses have implications for both firms and taxing authorities. Specifically, our findings suggest that MNCs might decrease their aggregate tax burdens by increasing coordination within the firm, or that governments might increase their aggregate revenues by improving coordinating enforcement across taxing authorities. Our study is novel in that we document, in a specific setting, how coordination influences MNCs’ tax reporting behavior.

The Relevance of Tax Cash Flow and Tax Expense

Empirical evidence on the relevance of cash flows and accruals, and changes in relevance over time is mixed. We extend this literature by examining the relevance of tax cash flow and tax expense. Income taxes offer a strong setting to study relevance because firms report both an accrual-based and cash flow-based measure of tax. We find the incremental predictive power of current-period tax cash flow for future tax cash flow is greater than that of current-period tax expense for future tax cash flow. Tax cash flow also dominates tax expense in explaining returns. Together, these results suggest tax cash flow is more relevant than tax expense. Our study extends the value relevance literature by demonstrating that specific accruals behave differently than aggregate accruals. Our study also informs the FASB’s decision about whether to require increased tax cash flow disclosure.

Tax Reporting Behavior under Audit Certainty

This study uses a confidential data set of firms assigned to the Internal Revenue Services Coordinated Industry Case (CIC) program to examine the effect of audit certainty on firms tax reporting behavior. We first model the determinants of assignment to the program. Although the ability and incentive to avoid taxes are related to CIC assignment, we find that the IRS assigns firms primarily based on size and complexity. We then test whether audit certainty has a detectable effect on tax payments. Our results show that tax payments do not change when firms enter the CIC program, suggesting the CIC program does not have higher deterrence or enforcement effects relative to the IRSs standard selection and audit process for large corporations not included in the CIC program. However, supplemental analysis suggests that audit certainty does alter managers expectations regarding future tax payments. Our paper provides new empirical evidence on the strategic game between the taxpayer and the tax authority and has important implications for tax authorities as they consider the costs and benefits of certain audit programs. Comportement en matiere de declarations fiscales en situation de controle assure Les auteurs utilisent un ensemble de donnees confidentielles relatives a des societes affectees au programme Coordinated Industry Case (CIC) de lInternal Revenue Service afin danalyser lincidence dun controle assure sur le comportement des societes quant a leurs declarations fiscales. Ils modelisent dabord les determinants de laffectation au programme. Bien que la possibilite d’eviter limpot et la motivation a le faire soient liees a laffectation des societes au programme CIC, les auteurs constatent que lIRS les y affecte principalement en fonction de leur taille et de leur complexite. Les auteurs verifient ensuite si le controle fiscal assure a une incidence decelable sur les paiements dimpot. Les resultats quils obtiennent revelent que les paiements dimpot ne changent pas lorsque les societes entrent dans le programme CIC, ce qui semble indiquer que le programme na pas deffet dissuasif ou persuasif plus important que celui du processus standard de selection et de controle fiscal que lIRS applique aux grandes societes non affectees au programme CIC. Une analyse complementaire permet toutefois de croire que le controle assure influe sur les attentes des gestionnaires en ce qui a trait aux paiements dimpot futurs. L’etude livre de nouvelles donnees empiriques illustrant le jeu strategique qui se joue entre le contribuable et le fisc, donnees qui ont des repercussions importantes pour les administrations fiscales dans leur analyse des couts et des avantages de certains programmes de controle fiscal.

Examining Which Tax Rates Investors use for Equity Valuation

We propose that investors rely on tax rate heuristics to reduce information processing costs associated with understanding complex income tax information and examine which rate investors use to impound income taxes into firm value. We find that the top U.S. statutory rate is more associated with firm value than the firm’s prior year effective tax rate (ETR), prior three-year average ETR or prior-year industry-average ETR. However, we find that investors rely less on the statutory tax rate when the benefits (costs) of doing so are higher (lower). Specifically, when firms have more opportunities for long-term tax savings or when information processing costs are lower investors rely less on the statutory tax rate. Our findings have implications for management in communicating tax information to investors and for standard setters in understanding which tax information investors use.

Equity Compensation and Tax Avoidance: Incentive Effect or Tax Benefits?

We examine two competing explanations for the negative relation between equity compensation and tax avoidance documented in prior research. The first explanation suggests that equity compensation aligns managerial interests and reduces managers’ incentives to invest in tax avoidance schemes that facilitate rent extraction. The second explanation predicts that tax benefits from equity compensation reduce firms’ demand for additional tax avoidance by lowering its marginal benefits. We find evidence that the tax benefits from equity compensation, and not incentive alignment, drive the observed negative relation. Our findings suggest that researchers should consider the tax benefits of equity compensation to be of primary importance and control for these benefits when studying tax avoidance. Further, our results challenge the theory that managers use tax avoidance to facilitate rent extraction. Studies that rely on nefarious managerial behavior to motivate tax avoidance in the context of agency problems should reconsider the validity of this theory.