American Taxation Association

JATA abstracts - Fall 2001

JATA - Fall 2001

Volume 23, No. 2

The Impact of Explicit and Implicit State Taxation of U.S. Government Obligations on the Structure of Banks' Investment and Financing Portfolios
Anne Beatty and David G. Harris

The Effect of Code Section Knowledge on Tax Research Performance
John A. Barrick

The Outsourcing of Corporate Tax Function Activities
Amy E. Dunbar and John D. Phillips

The Effects of Not-For-Profit Hospital Reported Profits and Charitable Care on Perceptions of Tax-Exempt Status
Kathryn J. Wilkicki

An Application of the Scholes and Wolfson Model to Examine the Relation Between Implicit and Explicit Taxes and Firm Market Structure: An Analysis
Brian Wright


The Impact of Explicit and Implicit State Taxation of U.S. Government Obligations on the Structure of Banks' Investment and Financing Portfolios

Anne Beatty and David G. Harris

Abstract

In this paper we examine the effects of differential state taxation of U.S. Government obligations (USOs) on how banks structure their investment and financing portfolios, the riskiness of banks' assets, and how implicit tax effects are impounded in investments' returns. Twenty-seven states tax USOs (taxing states) and twenty-three states and the District of Columbia do not (non-taxing states). We find that banks in taxing states hold significantly greater amounts of USOs, which are among the least risky assets banks can hold, and we find that these banks hold a less risky mix of assets. Consistent with compensating for the lower risk of their asset mix, we also find that these banks hold less capital. Taken together, these results are consistent with effective bank regulation enforcement, since banks have similar capital to risk weighted asset ratios in spite of differing tax-based incentives to hold riskless assets. We also examine the impact of implicit taxes on banks' USO holdings and related accounts and find that in taxing states banks' USO investments are decreasing in their state tax rate. We also find corresponding increases in asset riskiness which banks do not appear to fully compensate for in the highest state-tax-rate states. Finally, the effects shown in this paper are economically significant. For example, we find that banks operating in taxing states hold, on average, 40 percent less USOs than banks in non-taxing states.  Top


The Effect of Code Section Knowledge on Tax Research Performance

John A. Barrick

Abstract

This study investigates whether Code section knowledge, which allows direct access to relevant authority, affects tax research performance. This understanding is important because tax professionals are constantly searching the Code for relevant authority to resolve their clients' research questions, and because the Code is the ultimate source of tax authority. The research question is examined through an experiment that compares the research performance of experienced tax professionals and inexperienced graduate tax students when performing either a Code section or a topical search. The results indicate that experienced subjects are better able than inexperienced subjects to use Code section knowledge in tax research. In addition, the experienced subjects using the Code section method retrieved more relevant authority than any other group of subjects. Taken together, the results provide empirical evidence that Code section knowledge complements tax professionals' technical knowledge and improves tax research performance.  Top


The Outsourcing of Corporate Tax Function Activities

Amy E. Dunbar and John D. Phillips

Abstract

This study investigates the factors associated with firms' decisions to outsource corporate tax planning and compliance activities. The results indicate that transaction costs relating to human-asset specificity, proprietary technology, and economies of scale, along with the status of firms' top tax professionals and recent growth, are factors that help explain variation in the proportion of 1997 tax planning expenditures made to external service providers. In contrast, only firm size and growth help explain variation in the proportion of tax compliance activities outsourced. Finally, the results indicate that firms with more of a tax planning focus outsource greater (lesser) proportions of their tax planning (compliance) activities. These results provide the first empirical evidence relating to the economic motivations behind tax function outsourcing.  Top


The Effects of Not-For-Profit Hospital Reported Profits and Charitable Care on Perceptions of Tax-Exempt Status

Kathryn J. Wilkicki

Abstract

I investigate whether the hospital tax exemption decision is a function of (1) reported profits and (2) the amount of charitable care provided. Tax practitioners from public accounting firms made decisions about whether the hospital should maintain federal and state income tax, and local property tax exemptions. A between-subject design was used with cases at two dimensions: reported profits (high and low) and level of charitable care (high and low).

Findings revealed that the main effects of reported profits and charitable care do not independently appear to affect respondents' perceptions about tax exemption. However, when charitable care is low, respondents' perceptions about tax exemption were negatively influenced by high reported profits.  Top


An Application of the Scholes and Wolfson Model to Examine the Relation Between Implicit and Explicit Taxes and Firm Market Structure: An Analysis

Brian Wright

Abstract

Callihan and White (1999) present a methodology for applying Scholes and Wolfson's (1992) model of implicit tax rates to financial statement data. This methodology is aimed at addressing two issues: (1) measurement of implicit tax rates and (2) determination of the extent to which firms possessing market power can shift implicit tax burdens away from the firm. This paper examines Callihan and White's empirically-driven definition of implicit tax rates and points to the pitfalls of using this definition for firms that may possess market power. In particular, I show that, since the Callihan and White measure assumes that firms do in fact operate in perfectly competitive markets, it cannot validly be used to measure the magnitude of implicit taxes in the presence of firm market power. Additionally, my analysis casts doubt over the validity of Callihan and White's finding that implicit taxes are lower for firms possessing market power.  Top

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