Title

Are Declining Effective Tax Rates Indicative of Tax Avoidance? Insight from Effective Tax Rate Reconciliations

Publication Date

5-28-2017

Abstract

Researchers, policymakers, and the media often use effective tax rates (ETRs) to compare tax burdens across firms and time, relying on the assumption that low ETRs reflect firms’ intentional actions to reduce taxes. Using firms’ detailed tax footnote data, we examine GAAP ETRs over time and find that nearly all of the downward trend in domestic firms’ ETRs is explained by the effect of valuation allowances (VA) related to prior-period losses, rather than deliberate tax planning. Among multinational firms, the decline in ETRs results from both declining foreign tax rates and decreasing percentages of income subject to state taxes. Additionally, because VAs are associated with firm loss history and tax loss carryforward usage, our results also offer an explanation for time-series and cross-sectional variation in cash ETRs. Overall, our results suggest firms’ loss histories and GAAP rules influence inferences from tax avoidance proxies.

Document Type

Article

Keywords

Tax Avoidance, 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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