Abstract of Papers

Does stock price crash risk subside when the IRS imposes stricter corporate tax enforcement

Andrew M. Bauer (University of Waterloo), Xiaohua Fang (Georgia State University) and Jeffrey Pittman (Memorial University of Newfoundland), “Does stock price crash risk subside when the IRS imposes stricter corporate tax enforcement?”

We analyze whether tough tax enforcement generates a positive externality by lowering information asymmetry stemming from managers’ bad news hoarding activities evident in stock price crash risk. Supporting this prediction, we find a negative relation between the threat of an IRS audit and stock price crash risk. Our strong, robust evidence is consistent with recent theory that outside investors learn more about firms when corporate tax enforcement is stricter. In evidence consistent with another prediction, we find that the role that IRS audit rates play in constraining crash risk intensifies when firms experience worse agency conflicts stemming from CEO characteristics. Overall, our research implies that external monitoring by tax authorities protects shareholders against managers suppressing negative firm-specific information that engenders stock price crash risk, particularly when CEOs have a wider scope and stronger incentives to hoard bad news.

Assessing BEPS: Origins, Standards, and Responses

Allison Christians (McGill University) and Stephen Shay (Harvard University), “Assessing BEPS: Origins, Standards, and Responses”

The G20/OECD’s multi-year campaign to combat base erosion and profit shifting (BEPS) marks a critical step in the evolution of the international tax regime and the roles of institutions that guide it. This General Report for Subject 1, IFA Congress 2017, provides a snapshot of the international consensus regarding the outcomes of the BEPS project by comparing national responses to key mandates, recommendations and best practices through the end of October, 2016 based on National Reports representing the perspectives of 48 countries. These National Reports reveal that the impact of the BEPS initiative on a particular country corresponds to at least three key factors, namely: (1) the extent to which domestic law is already in substantial compliance with BEPS outcomes; (2) the degree to which implementation of BEPS outcomes appears capable of delivering positive revenue or economic results, or both, relative to a country’s experiences and perceptions prior to BEPS; and (3) the type and degree of involvement of a country in the formative stages of the initiative preceding the release of the final BEPS action plans.

The General Report observes that as BEPS continues to unfold, it is difficult to gauge the full extent to which countries in fact will adhere or defect from the rules. However, it is not too early to consider how the project proceeded and make observations for work going forward and future efforts at global tax cooperation. In some respects, the clearest observation gleaned from the BEPS project is not a “learning,” but is a reality. The BEPS project has witnessed the transition of global tax governance from the OECD’s province of the developed north to global fora wherever those fora may be housed institutionally. This leaves a series of open questions regarding agenda-setting for international tax policy going forward. As we conclude this interim snapshot of the origins, standards, and responses to BEPS to date, we look to future IFA congresses for answers to these questions and a final assessment of the BEPS project.

Taxation without Information: The Institutional Foundations of Modern Tax Collection

Wei Cui (University of British Columbia), “Taxation without Information: The Institutional Foundations of Modern Tax Collection”

A prominent strand of recent economic and legal scholarship hypothesizes that third-party information reporting (TPIR) is essential to modern tax collection. The slogan, “no taxation without information,” has captured researchers’ imagination and is even often presented as self-evident truth. This Article offers a fundamentally different perspective, arguing that the emphasis on TPIR is misplaced. TPIR is used largely in the collection of the personal income tax but not of many other types of modern taxes. Even for the personal income tax, TPIR also has close substitutes which do not involve information transmission to the government. Theoretically, appeals to TPIR are vitiated by the puzzle of payor compliance. And most purported empirical evidence for the effectiveness of TPIR fails to provide causal identification.

I suggest that to better understand the institutional foundations of modern tax collection, we should stop thinking of business firms as “fiscal intermediaries” in a game of deterrence against tax evaders. Instead, it would be more fruitful to conceive of firms as sites of social cooperation under the rule of law. The co-evolution of the business firm and modern regulatory law may have enabled modern governments to practice precisely “taxation without information”.

Implicit corporate taxes, investment, and income shifting

Kevin S. Markle (University of Iowa), Lillian Mills (University of Texas at Austin) and Braden Williams (University of Texas at Austin), “Implicit corporate taxes, investment, and income shifting”

Implicit tax theory predicts that as capital moves to tax-favored investments, the expected pre-tax returns on those investments decrease. Following this theory, we predict that corporate tax rates are associated with realized pre-tax corporate returns and with investments in capital and labor. We analytically model and empirically test our predictions in two samples of European firms: single-country firms and affiliates of multinational firms. In the sample of single-country firms, we find robust evidence of country-wide implicit taxes. In the sample of multinational firms, we also consider the confounding effect of cross-border income shifting and find that the effects of income shifting overwhelm the effects of implicit taxes. Our results should caution policymakers that statutory rate decreases can decrease firm profitability. The results also imply that measures of income shifting estimated using reported profits are understated when the effects of implicit taxes are ignored.

Income Shifting and the Cost of Incorporation

Alisa Tazhitdinova (McMaster University), “Income Shifting and the Cost of Incorporation”

Drawing on administrative data covering the full population of self-employed individuals in the UK, I study the extent of income shifting from personal to corporate tax bases through incorporation. Despite large tax savings to incorporation (exceeding 10% in some years), a substantial proportion of business owners fails to incorporate. Using a revealed preference approach, I estimate an average cost of incorporation to be greater than £3200. Next, I estimate a proportional hazard model and uncover moderate elasticities of hazard rate of incorporation with respect to tax savings. These findings imply that income shifting through incorporation is not the primary avoidance channel for the self-employed and that distortions to the choice of organizational form are modest. At the same time, the large perceived cost of incorporation implies that barriers to entrepreneurship remain large.