JATA - Fall 1989

Volume 11, No. 1

Statutory Tax Rate Reform and Charitable Contributions: Evidence From a Recent Period of Reform

Amy J. Broman

This paper uses a model of changes in individual contributions, measured over a period of statutory tax rate reform, to estimate the price elasticity of contributions. This type of model reduces the omitted variable bias and econometrically dominates the traditional, single-period model of contributions. The basic empirical findings are that the price elasticity of giving is quite small, and that the smallness of the elasticity estimate cannot be attributed to a lagged adjustment of giving to changing tax parameters. Additionally, the analysis shows that although contributions are not elastic with respect to current price, they are sensitive to anticipated future changes in price. That is, there is substantial substitution between contributions of different periods when a future tax rate (price) change is anticipated.

Ambiguity and the Evaluation of Client Documentation by Tax Professionals

Richard T. Helleloid

Tax professionals play an important role in the application of ambiguous tax law to ambiguous fact situations. For purposes of this study, a more ambiguous situation was defined as one in which the available evidence should afford less confident judgments. A common source of ambiguity for tax professionals is weak client documentation. This paper relates prior psychological research on ambiguity to a specific tax issue, business auto documentation. In addition, the paper reports the results of two experiments in which tax professionals were asked to make judgments about business auto expenses. In each of these experiments ambiguity was operationalized as the contemporaneousness of the client's records; in each experiment ambiguity was manipulated between subjects. In the first experiment subjects exhibited no sensitivity to the ambiguity of the client's documentation when determining deductions for business auto expenses. In the second experiment the ambiguity of the client's documentation did have a statistically significant effect on the mileage amounts subjects would use when determining deductions for business auto expenses. However, the size and extent of this effect from a practical standpoint was modest. The results suggest that many tax professionals do not believe that their role includes rigorous enforcement of stringent documentation standards.

Predictive Abilities of Three Modeling Procedures

James E. Parker and Kenneth F. Abramowicz

Numerous researchers have developed predictive models by applying statistical methods to historical data. Most have used multiple discriminant analysis (MDA), while multivariate probit analysis (MPA) has gained preference in recent years. In this paper, the authors report the results of a two-part study in which a relatively new procedure, recursive partitioning (RP), is shown to produce as good or better predictive models. The performance of RP relative to the more traditional methodologies is demonstrated using both multiple data sets of computer simulated data and in a single application to a set of 130 actual Tax Court decisions. Relatively superior predictive ability of the RP methodology was also found in a separate study of Tax Court decisions by Garrison and Michaelsen beginning at page 77 in this journal.

Tax Regimes and the Demand for Risky Assets: Some Experimental Market Evidence

Charles W. Swenson

The demand for risky assets, under various tax regimes, is examined using an experimental market. Both aggregate/market and individual portfolio holdings are generally consistent with theoretical predictions. However, the market mechanism results in a shifting of tax benefits (or costs) from buyers to sellers, a result not predicted by previous theory. Tax policy implications are discussed.

Symbolic Concept Acquisition: A New Approach to Determining Underlying Tax Law Constructs

Larry R. Garrison and Robert H. Michaelsen

This paper describes the use of symbolic concept acquisition to analyze Tax Court decisions. The Analog Concept Learning System (ACLS) computer program is used to construct rules that explain the behavior of the Tax Court in determining scholarship or fellowship grant status. The results are compared with those produced by discriminant analysis and LOGIT. This comparison indicates the ACLS rules are more accurate at predicting the outcome of Tax Court decisions for this area of tax law.

Effects of Communicating Sanctions on Taxpayer Compliance

George R. Violette

This study examines the impact of sanction communications on taxpayer compliance. Deterrence theory suggests the importance of both legal sanctions and informal sanctions such as fear of social stigma, in obtaining compliance. A laboratory experiment was designed to test the compliance impact of communicating existing legal sanctions and potential informal sanctions. The experiment provides evidence that communicating existing legal sanctions may increase compliance. However, the communication of potential informal sanctions did not lead to significant compliance improvement.

Corporate Leasing Versus Property Ownership Under the Tax Reform Act of 1986

Jane 0. Burns, Karen S. Hreha, and Suzanne M. Luttman

This paper analyzes the decision of whether to lease or purchase property after the Tax Reform Act of 1986 (TRA86). Several authors have predicted that the increased cost of owning an asset under TRA86 would cause many corporations subject to the alternative minimum tax (AMT) to lease more personal assets. The results of this study suggest that (1) the cost of ownership may have increased more than anticipated and (2) leasing may not be as beneficial as might be expected. The best action for corporations in an AMT position to minimize their after-tax costs may be to lease longer-lived assets but purchase shorter-lived property. Consequently, leasing can be used selectively to maximize after-tax income, but leasing is not the panacea espoused in the press.

College Cost and the Relief Provided by Residential Real Estate

Michael H. Morris

This study, in contrast to recent suggestions for helping families pay the cost of a college education, offers an alternative that can provide immediate relief for parents. It analyzes, summarizes, and simplifies the many variables associated with a house/condominium purchase and provides for direct comparison with the related costs of dormitory usage through a series of indifference curves. The analysis reveals that the housing appreciation rate that makes one indifferent between incurring dormitory costs and purchasing a dwelling unit is primarily a function of the housing price and the number of other students renting the unit. The results suggest that the housing portion of college- education costs can be reduced or eliminated for a wide variety of individual circumstances by the purchase of a house or condominium.