JATA - Spring 1991

Volume 13, No. 1

Financing Value-Added Tax Cash Flows

Robert P. Crum


Despite the numerous value-added tax (VAT) proposals considered by Administrative and Congressional policy makers, no prior empirically-based comparative study has been made of the cash-flow effects of a broad range of VATs on individual companies. Furthermore, economists and accountants have not analyzed the effects that financing those cash flows may have on neutrality. This study develops a VAT cost-of-financing (COF) model for evaluating VAT proposals from three interrelated neutrality perspectives. The analysis, which uses 1977-82 financial data, reveals that VAT forms can have markedly different COFs, can vary in the equality of their distribution of COF among companies, and can provide differential incentives for companies to alter their production functions. Some forms give companies financing benefits, but no one VAT form is found to be neutral from all perspectives. Implications for tax policy and future research are discussed.

The Effect of the Alternative Minimum Tax Book Income Adjustment on Accrual Decisions

Jeffrey D. Gramlich


This study utilizes cross sectional regression analysis to examine the effect of the corporate alternative minimum tax book income adjustment (AMTBIA) on corporate accrual decisions. Results indicate significant income-decreasing accrual behavior in 1987, the initial year of the book income levy. Further, the evidence generally supports a "big boom" hypothesis in which managers chose income-increasing accruals in 1986, the final year preceding the tax on book income. In both years, transportation and communication firms and financial service organizations exhibited the greatest modification of accruals.

Measurement of Effective Corporate Tax Rates Using Financial Statement Information

Thomas C. Omer, Karen H. Molloy, and David A. Ziebart


A number of empirical studies have used effective tax rate (ETR) measures calculated from financial statement information to examine the relations between taxes, firm decisions, and firm characteristics. This study investigates two issues relating to the use of ETRs: (1) the potential for defensible alternative measures to provide different results, and (2) the problems associated with using financial statement information to estimate tax and income.

Our results indicate that alternative ETR measures and systematic deferred tax reporting differences in the financial statements cause notable shifts in estimated ETRs. The systematic deferred tax differences have a predictable directional effect on estimated ETRs. In addition, this effect is not cancelled when comparisons between deterred tax reporting groups are made. In light of these results, researchers should evaluate the robustness of their results across alternative ETR measures. Our results also suggest that systematic differences in the financial reporting of deferred tax liabilities are related to firm size. Use of the deferred tax expense amount rather than the change in the long-term deferred tax liability in the ETR measure should alleviate this problem across alternative ETR measures.

Replication of Empirical Tax Research

Carol M. Fischer and John D. Russell


This paper describes a process for performing replications of empirical research, with the replication of Wilkie's (1988) analysis of effective tax rates as a specific case study. The paper proposes that replications can be used as an effective pedagogical device to develop the research skills of doctoral students. Further, it is argues that replications serve to promote high quality research. In describing the replication process, the paper discusses criteria for selecting a study to replicate, the planning process, data preparation, the resolution of discrepancies, and conducting the extension. The case study is presented to illustrate the process. The results of the replication, which fully substantiated Wilkie's results, are briefly described, and the results of the extension, which suggest that Wilkie's model is not as powerful for cash flow measures of effective tax rates as it is for accrual-based measures, are discussed.

The Tax Aspects of Exportation: A Decision Model Approach

Ernest R. Larkins


The purpose of this paper is to develop decision models that can be used to determine whether one of the tax-favored export entities described in the Internal Revenue Code should be utilized and, if so, which one is the most favorable. Since the interest-charge domestic international sales corporation (DISC), a tax deferral vehicle, and the foreign sales corporation (FSC) and small foreign sales corporation (SFSC), tax exemption vehicles, involve different cash flow patterns, the models consider the time value of money, among other things. The models are analyzed using different levels of selected variables. The break-even sales volume of exporters was found to be especially sensitive to profit margin assumptions and the spread between the cost of capital and the T-bill rate. Exporters that switch from a DISC to a FSC when export sales begin to increase may be able to increase the present value of their after-tax profits.