JATA - Spring 1998

Volume 20, No. 1

Investments in Tax Planning

Lillian Mills, Merle Erickson, and Edward Maydew


This paper analyzes investments in tax planning. The literature is replete with examples of specific tax planning strategies. However, little is known about how firms invest in tax planning to develop these strategies or the firm-wide returns to investments in tax planning. We use data from a confidential survey by Slemrod and Blumenthal (1993) in which 365 large U.S. corporations shared data on their tax-related expenditures. We find that: (i) planning costs (as a percentage of selling, general and administrative expenses (SG&A)) decrease in firm size, (ii) firms with foreign operations invest more heavily in tax planning, (iii) capital intensity and number of legal entities are positively related to tax planning costs, and (iv) inventory intensity and leverage are unrelated to tax planning costs. Finally, our estimates indicate a negative relation between investments in tax planning and tax liabilities. On average, an additional $1 investment in tax planning results in a $4 reduction in tax liabilities. This relation holds over specifications with and without industry controls, within the manufacturing industry alone, and in the presence of controls for tax planning opportunities.

Wealth Effects of Tax Related Court Rulings

Merle Erickson and Dan S. Dhaliwal


This study analyzes the wealth effects of three court rulings relating to the amortization of intangible assets for tax purposes. Our results indicate that the Supreme Court's ruling in Newark Morning Ledger in which the court ruled that the disputed intangible asset was depreciable for tax purposes resulted in positive share price revisions for firms with acquired intangibles. Overall, this work provides evidence that tax related court rulings have wealth effects for firms in a similar tax situation, and that tax benefits from intangible asset amortization influence equity values.

How Tax Policy Can Thwart Regulatory Reform: The Case of Sulfur Dioxide Emissions Allowances

Richard Sansing and Todd Strauss


This paper examines the interactions between three tax policies and the use of tradeable sulfur dioxide (SO2) emissions allowances. The tradeable emissions allowances program uses a market mechanism to achieve a given reduction in SO2 emissions at the minimum social cost. The three tax policies we examine are the rapid amortization of pollution control facilities, the nonrecognition of income upon receipt of emissions allowances, and the deductibility of the fair market value of appreciated capital gain property donated to charity. The analysis shows that in each case, the tax policy choice undermines the efficiency of the tradeable emissions allowance program.

Taxpayer Reaction to Perceived Inequity: An Investigation of Indirect Effects and the Equity-Control Model

James R. Maroney, Timothy J. Rupert, and Brenda H. Anderson


While an emerging body of literature has examined the direct effects of fairness perceptions on taxpayer compliance, this study contributes to the literature by examining indirect effects (i.e., the effect of the perceived fairness of taxing one type of income on the compliance decision for reporting another type of income). The equity-control model is also used to examine the potential moderating effect that taxpayers' perceived level of control over the tax process has on their reaction to preceived inequity. To test the hypotheses, evening, part-time adult students were given a hypothetical taxpayer scenario. The results indicate that fairness perceptions of taxing a single type of income (unemployment compensation) have a significant effect on the reporting decision for an unrelated form of income (self-employment income), as well as on the perceived fairness of the total tax burden. Further, consistent with predictions from equity-control theory, the taxpayers' perceived levl of control over the tax process was found to have a significant moderating effect on noncompliance for those participants who considered their tax burden inequitable. These results have important policy implications regarding strategic initiatives designed to improve taxpayer compliance.

Tax Accountants' Judgment/Decision Making Research: A Review and Synthesis

Michael L. Roberts


This paper reviews the extant research literature on tax accountants' judgment/decision making [JDM] and suggests directions for future research. An economic psychology processing model links five categories of factors that affect tax accountants' JDM: individual cognitive and affective psychological factors, economic risks and rewards in the external environment, task inputs, cognitive processing, and task outputs. Empirical findings are related to the model and contradictory results attributable to subject, task, or design are reconciled. Empirical findings indicate important factors in tax accountants' JDM include individual psychological factors such as tax accountants' knowledge, experience, and advocacy attitudes, and economic environmental factors such as the amount of tax savings at stake, risks of audit and penalties, client risk preference, and maintaining client relations. Promising future research directions include linking knowledge more directly to performance and explicating the formative stages of JDM: problem recognition and representation, internal and external information search, and analysis and application of tax authorities. 

Optimal Capital Gains Realization by Individual Taxpayers in the Presence of Capital Losses

David S. Hulse


This paper examines the optimal action of an individual taxpayer when capital losses in excess of capital gains already have been realized. Many sources advise such a taxpayer to realize additional capital gains, which can then be used to absorb the excess capital losses. Although earlier recognition of capital gain net income is not necessarily detrimental, it often is because it tends to increase the present value of taxes paid on such income. The intuition behind this result is that taking such action merely accelerates the taxation of the gains and the deduction of the losses, and the net effect is generally to accelerate the recognition of capital gain net income.