JATA - Fall 1988

Volume 10, No. 1

A Horizontal Equity Analysis of the Minimum Tax Provisions: 1976-1986 Tax Acts

Kenneth Anderson


This study extends previous research [Anderson, 1985] by (1) replicating the horizontal equity analysis of minimum taxes under the Tax Reform Act of 1976 (TRA76) and the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) using samples from 1978 and 1983 Individual Tax Models and (2) examining the horizontal equity impact of the recently enacted Tax Reform Act of 1986 (TRA86) using both data sets. The results support the previous study's conclusion that the TRA76 add-on minimum tax enhances horizontal equity more than the TEFRA alternative minimum tax. The study also concludes that the regular tax under TRA86 increases horizontal equity far more than did the minimum tax under prior law and that the alternative minimum tax under TRA86 makes a moderate additional contribution to horizontal equity.

Evidence on Judgment Involving the Determination of Substantial Authority: Tax Practitioners versus Students

Otto H. Chang and Thomas M. McCarty


This paper examines judgments of substantial authority made by tax practitioners and tax accounting students. The experiment was cast within a multivariate lens model and administered to 30 tax practitioners and 52 accounting students. Judgmental consensus, self-insight, and stability were found to be moderately high for tax practitioners and lower for the accounting students. Experience and firm type effects also were analyzed.

The Role of Experimental Economics in Tax Policy Research

Jon S. Davis and Charles W. Swenson


This paper describes the application of experimental economics to research examining the impact of tax policies on individual and aggregate behavior. The paper discusses the benefits and limitations that arise from using experimental economics as a supplement to existing methods in tax policy research. In addition, with the aim of providing guidance to tax researchers interested in adopting the method, various methodological issues are examined, including a description of how markets are created in the laboratory and a survey of practices commonly applied in experimental economics research. Last, a review of the limited tax research to date using the method is presented, along with a discussion of some tax policy issues that experimental economics can be used to address.

An Analysis of "Substantiality" Under the Section 704(b) Final Regulations

Stephen T. Limberg and Sally Morrow Jones


Special allocations of partnership income and loss are allowed if the allocation has Substantial Economic Effect (SEE). In 1985, SEE was interpreted in final Treasury Regulations that provided an ambiguous definition of substantiality. The purpose of this study is to develop a quantitative model of substantiality from an analysis of the language in the Regulations. We identify two models from the regulations and the professional literature. One model compares the ratio of the present value cash flow detriment of one partner under a special allocation to that partner's present value cash flow under the general allocation. Another model compares the ratio of the present value cash flow detriment of one partner to the present value cash flow enhancement of another partner under the same special allocation. Critical values of the ratios must now be established by the IRS or courts, or inferred from future rulings.

Corporate Average Effective Tax Rates and Inferences about Relative Tax Preferences

Patrick J. Wilkie


Previous research on corporate average effective tax rates (ETRs) has consistently shown that ETRs vary across firms and over time and has explained this finding solely in terms of the cross-sectional and intertemporal differences in firms' "tax preferences." This paper challenges the completeness and reliability of this explanation by developing and empirically testing a model of the ETR which shows that variations in ETRs are caused by differences in both tax preferences and income whenever tax preferences and income are not perfectly correlated. Further, it shows that cross-sectional differences in intra-industry ETR variances are caused, not by differences in the variation of tax preferences alone, but by differences in the variation in income and in the level of tax preferences and income as well.

Tax Base Differences Between Worldwide and Water's Edge Methods of Unitary Taxation

Karen S. Hreha and Peter A. Silhan


This paper compares the worldwide method and the water's edge method of unitary taxation in terms of their differential impact on the tax bases of a large sample of U.S.-based multinational corporations. A survey of the Fortune 500 was used to obtain data for computing these differences. Survey findings indicated that while the worldwide method produces double taxation in many cases, it also results in under taxation in many others. The results help explain why worldwide unitary combination for state tax purposes has been so controversial.

Understanding Changes in Tax Laws with Variance Analysis

Wig De Moville


Variance analysis may be useful classroom teaching technique for explaining the impact of changes in tax laws on a taxpayer who is affected simultaneously by several changes. This nontraditional usage of variance analysis is illustrated through an example involving depreciable property.