JATA - Fall 1997

Volume 19, No. 2

The Effect of Moral Reasoning and Educational Communication on Tax Evasion Intentions

Steven E. Kaplan, Kaye J. Newberry, and Philip M. J. Reckers


This study uses an experiment to examine the effect of moral reasoning and educational communication on tax evasion intentions. Taxpayers were randomly assigned to alternate educational communication, and then responded to four hypothetical tax scenarios. Moral reasoning was measured with the Defining Issues Test. The results indicate that tax evasion intentions are significantly lower for those taxpayers who utilize high moral reasoning in their decision making. The results also support that moral reasoning moderates the effectiveness of certain educational communications. Specifically, it was found that a legal sanctions communication significantly lowers tax evasion intentions for only those taxpayers who utilize low moral reasoning. The findings extend prior tax compliance research and suggest policy implications related to the IRSâ proposed development of educational programs to increase voluntary compliance.

Tax Costs and Nontax Benefits: The Case of Incentive Stock Options

Steven Balsam, Robert Halperin, and Haim Mozes


The Tax Reform Act of 1986 (TRA 86) by causing the highest corporate tax rate for corporations to be higher than the highest individual rate gave corporations a tax incentive to issue Nonqualified Stock Options as opposed to Incentive Stock Options (ISOs). Nevertheless, some firms continue to issue new ISOs, despite the tax cost of doing so. We hypothesize that firms with the greatest investment opportunity sets are most likely to issue ISOs in order to tie employees to the firm. Our empirical results are consistent with this hypothesis. We also show that these firms also use other, less costly mechanisms, such as pension plans and salary deferrals to tie their employees. Consistent with the tax incentive hypotheses, fewer firms in our sample issued ISOs after TRA 86 than before.

The Effect of the Tax Reform Act of 1986 on the Capital Structure of Foreign Subsidiaries

James Kalman Smith


The Tax Reform Act of 1986 (TRA86) changed the interest allocation rules and now require U.S. multinational (MNCs) to allocate a portion of their U.S. interest expense to foreign source income for purposes of calculating their foreign tax credit (FTC). As a result, incentives were created for U.S. MNCs to increase the debt levels of their foreign subsidiaries. I use a large sample of foreign subsidiaries of U.S. MNCs to test the impact of the changes to the interest allocation rules. A second large sample of foreign subsidiaries of non-U.S. MNCs is used as a basis of comparison. The results indicate that U.S. MNCs increase the debt of their foreign subsidiaries after 1986, while non-U.S. MNCs do not increase the debt of their foreign subsidiaries. The increase in debt of the foreign subsidiaries of U.S. MNCs is related to key FTC characteristics of their U.S. parent.

Measuring the Statistical Significance of Differences in Tax Progressivity and Income Inequality

Govind Iyer and Ananth Seetharaman


In applied tax and income distribution studies the predominant practice is to use the Lorenz curve and one or more indexes derived from the Lorenz curve to describe the distributional effects of tax law changes. However, where sample data are used, sampling variation is present. Observed distributional differences across alternative tax systems may, therefore, be attributable to sampling variability. This paper outlines and explains the methodology by which data underlying Lorenz curves can be used for inferential rather than just descriptive purposes. The methodology is demonstrated by applying it to evaluate the effect of the income tax system on income inequality and that of the earned income credit on overall progressivity and income inequality.

Teaching the Introductory Tax Course: A Template of the Federal Income Tax Formula, Taxpayer Activities, and Taxpayer Entities

Patrick J. Wilkie and James C. Young


In this article, we describe an alternative method of teaching introductory taxation that refines the Jones and Duncan (1995) paradigm. These refinements in the conceptual framework are necessary, we believe, in order for it to be successfully implemented. Our alternative method draws upon the research in human information processing to create a three-dimensional framework of taxation. These three dimensions include: (1) the federal income tax (FIT) formula, (2) taxpayer activities, and (3) taxpayer entities. Using this method, we begin by providing a working knowledge of the elements in each dimension. We then introduce the transactions that comprise a taxpayer-activity and describe the general tax rules for those transactions. These general tax rules are then refined by applying the transactions to specific entities. This process is repeated for each of the remaining taxpayer activities. Our experience suggests that this three-dimensional framework enables students to better understand, remember, and apply tax knowledge.