Title

The Sources of Declining Effective Tax Rates: Insight From Effective Tax Rate Reconciliations

Publication Date

5-28-2017

Abstract

Using firms’ tax rate reconciliations, we examine the sources of declining effective tax rates (ETRs) among profitable firm-year observations. We find the downward trend in domestic firms’ ETRs is largely attributable to the effects of decreases to the valuation allowance (VA) account. Our results indicate that failure to consider a firm’s loss history biases GAAP ETRs downward, since most VA decreases occur in profitable years but increases in VA occur in loss years, which are generally excluded from tax studies. To address this bias, we introduce a methodology for estimating the probability of VA release. Additionally, we find that the decline in multinational firms’ GAAP ETRs arises from declining foreign tax rates and decreasing amounts of income subject to state taxes. Our study provides new insight into the relative burdens of taxation across groups of firms, and how those burdens have changed over time.

Document Type

Article

Keywords

Effective tax rates, Book-tax differences, Multinational firms

Disciplines

Accounting

DOI

10.2139/ssrn.2974219

Source

SMU Cox: Accounting (Topic)

Language

English

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