JATA - Spring 1988

Volume 9, No. 2

An Analysis of the Tax and Incentive Considerations Involved in Employee Leasing

John C. Anderson and Barbara R. McIntosh


Recently, there has been significant growth in the leasing of employees. While this growth was due partially to certain unique advantages of employee leasing, it also was coincident with a provision in the Tax Equity and Fiscal Responsibility Act of 1982. This provision has been interpreted to provide a firm, leasing some or all of its employees, pension plan options and tax-related incentives not available since the enactment of the Employee Retirement Income Security Act of 1974. However, the Tax Reform Act of 1986 contains amendments that alter the use of this provision. This study represents an extension of existing analytical research on the tax and incentive issues related to employee compensation packages and provides a basis for assessing the effects of the Tax Reform Act of 1986 and any prospective tax law amendments affecting employee leasing.

Hindsight Judgments About Taxpayers' Expectations

Richard T. Helleloid


Research in psychology has demonstrated the phenomenon labeled "hindsight bias." Hindsight bias means that individuals overestimate the extent to which they-or someone else-had expected a (now realized) event. There are many areas of federal tax law in which tax treatment is to be determined in hindsight with reference to the taxpayer's prior expectations. This paper identifies several such areas in the law and provides a legal analysis of the appropriate reliance to be placed on hindsight in estimating a taxpayer's priors. In addition, the paper reports results of an experiment which tested for reliance on hindsight by tax advisors when evaluating these issues. In the experiment, tax professional subjects read three tax cases and were asked to make judgments based on the case facts. Subjects were randomly assigned to two different groups. Hindsight evidence was manipulated between subject groups by varying the information provided in the last sentence of each case. The experiment provided no evidence of hindsight bias, i.e., non-normative use of hindsight evidence. Rather, subject's reliance on hindsight evidence was consistent with the analysis of the law provided in this paper. Suggestions for further research on hindsight bias, in general, and on hindsight bias in the tax domain, in particular, are provided.

The Effect of Peer Reporting Behavior on Taxpayer Compliance

Peggy A. Hite


The effect of the tax reporting behavior of one's peers on taxpayer compliance was examined in this experimental study using prospective jurors. A hypothetical reporting decision was affected by the type of income to be reported, but, contrary to implications from prior studies, it was not directly affected by the peer manipulations. The study also explored the influence of variables cited in prior studies. The results showed that attitudes toward evading taxes and previous tax evasion were significant factors in explaining the experimental reporting decision. Those two variables were then analyzed to examine which background variables were the most salient in explaining tax attitude and actual past evasion.

The Security Market Impact of a Tax Law Change: Possessions Corporation Revisions

James G. Manegold and Stewart S. Karlinsky


Using an "events" methodology, this study analyzed the market impact of possessions corporation (PC) tax changes enacted by the Tax Equity and Fiscal Responsibility Act of 1982. Three announcement dates relevant to proposed PC revisions were identified, and three sets of analyses were conducted: an assessment of the security market effect of the PC announcements, an examination of the sensitivity of sample companies to the PC changes, and an estimation of dollar revenue generated by the revisions. The results indicated a significant impact in the expected direction for all announcements, a significant relationship between a company's cumulative market reaction and its previous use of PC benefits, and a dollar estimate slightly smaller than the Treasury's. These conclusions have implications for policy makers in their assessment of the impact of proposed tax changes, while the methodological refinements are relevant to academic researches considering a similar design.

Tax Compliance: An Investigation of Key Features

Valerie C. Milliron and Daniel R. Toy


This paper addresses the problem of tax noncompliance by individuals through and examination of CPAs' perceptions of seven key compliance features: deductions permitted, IRS information services, withholding and information reporting, preparer responsibilities and penalties, the probability of audit, tax rates, and taxpayer penalties. The relative importance of these features, support for implementation, and overall compliance system preferences were addressed by using three different methodologies. Hybrid conjoint analysis was used to determine the relative salience of each of the compliance features. A choice simulation model was then applied to these results to project preferences for alternative compliance systems. In addition, subjects responded to a series of questions regarding their attitudes about various compliance features of the tax system. The results indicate that Pas consider reducing tax rates to be the single most important feature for increasing tax compliance. When the results are modeled in a compliance system context, a flat tax system that maintains or reduces the penalty structure emerges as the most popular choice. The competing perspectives of economic deterrence and fiscal psychology are discussed for assessing the results. Economic deterrence models assume individuals are utility maximizers who will evade tax whenever the projected benefit exceeds the cost. Fiscal psychologists, however, maintain that taxpayer belief in the system rather than the penalty structure is more salient in generating compliance. The results are consistent with the fiscal psychology paradigm, which suggests that changing the tax structure, not increasing penalties, is the key to improving tax compliance.

Refunding Non-Callable Bonds: An Update of a Tax-Oriented Decision Model in Light of the Tax Reform Act of 1986

Jeffrey D. Gramlich, Kenneth F. Abramowicz and James E. Parker


Prior research has demonstrated certain profitable bond refunding opportunities awaiting corporations that issued non-callable bonds during times of relatively higher interest rates [Emery and Lewellen, 1984; Parker, 1986]. This paper analyzes the effect of the Tax Reform Act of 1986 on the profitability of such transactions. Each of the four examples presented by Parker [1986] is evaluated comparatively across time using the tax rates and capital gain rules of 1986, 1987, and 1988. The results indicate drastic declines in the values of bond refundings to corporations and shareholders. This impact is due to the decline in both corporate and individual tax rates and to the elimination of the long-term capital gain deduction.