American Taxation Association

JATA abstracts - Spring 2001

JATA - Spring 2001

Volume 23, No. 1

The Influence of Tax and Non-Tax Costs on Book-Tax Reporting Differences: Public and Private Firms
Lillian F. Mills And Kaye J. Newberry

Tax-Based Saving Incentives and Qualified Partial Exclusion Plans
Michael J. Calegari

Effects of Unitary Versus Non-Unitary State Income Taxes on Interstate Resource Allocation: Some Analytical and Simulation Results
Michael G. Williams, Charles W. Swenson And Terry L. Lease

The Effects of Staff Accountant Objectivity in the Review and Decision Process: A Tax Setting
Richard Charles Hatfield

Experimental Evidence on the Relation Between Tax Rates and Compliance: The Effect of Earned vs. Endowed Income
Scott J. Boylan and Geoffrey B. Sprinkle


The Influence of Tax and Non-Tax Costs on Book-Tax Reporting Differences: Public and Private Firms

Lillian F. Mills And Kaye J. Newberry

Abstract

We provide archival evidence on firms' book-tax reporting differences using tax return data on public and private manufacturing firms. Prior research suggests that managers should report conforming book income to minimize tax-related costs. However, reporting conformity can also impose non-tax costs. We find evidence that public firms have generally higher financial reporting costs that result in larger book-tax differences. In addition, we find that higher debt levels impose greater non-tax costs on firms that are privately held or more financially distressed. Finally, our tests of differences among public firms suggest that non-tax costs associated with bonus plan thresholds and book income patterns affect their book-tax reporting. Our tests extend prior studies that focus on whether firms engage in specific conforming transactions. From a tax policy perspective, our results suggest that book-tax differences may be a less useful indicator of private firms' aggressive tax positions because they have fewer incentives to report non-conforming book income. Top


Tax-Based Saving Incentives and Qualified Partial Exclusion Plans

Michael J. Calegari

Abstract

This study examines the effect of two types of qualified partial exclusion (QPE) plans on saving incentives, government revenues, and progressivity. In a "pure" QPE Plan, individual taxpayers who do not deduct any interest expenses on their tax returns can partially exclude their interest, dividend, and capital gain income, subject to a maximum exclusion. In an "expansive" QPE Plan, taxpayers can partially exclude their net investment income (reduced by deductible interest other than home mortgage interest and trade or business interest), subject to a maximum exclusion. The paper considers three alternative exclusion ceilings: $10,000, $15,000, and $20,000 for joint returns and $5,000, $7,500, and $10,000, respectively, for other taxpayers. Depending on the size of the maximum exclusion, the percentage of taxpayers who would be eligible to exclude all of their investment income varies between 77 and 81 percent under a pure QPE Plan and 92 and 96 percent under an expansive QPE Plan. Top


Effects of Unitary Versus Non-Unitary State Income Taxes on Interstate Resource Allocation: Some Analytical and Simulation Results

Michael G. Williams, Charles W. Swenson And Terry L. Lease

Abstract

This study examines the optimal location choice decisions of a two-state firm in response to changing state corporate income tax rates and tax structures. Because the firm can engineer its tax liability by manipulating between-state location of sales, property, and payroll, changes in relative state tax rates should result in the firm making such location changes. Results of a model firm simulation, examining various combinations of state tax rates and unitary versus non-unitary tax structures, found that the firm would make interstate resource changes to minimize company-wide state income taxes.

Important findings of the study are that tax rate changes in non-unitary states may cause little or no change in resources used in that state. Indeed, in one scenario, the resulting resource flows from a tax increase are favorable to the non-unitary state, making a tax increase a win-win situation for the state government (higher tax revenue and more economic activity). In contrast, changes in unitary state tax rates can result in significant resource changes in both the unitary state and in other states. The finding that tax rate cuts are ineffective in non-unitary states implies that these states may be more successful in attracting investment by changes affecting apportionment factors (tax credits for new capital, or new jobs) or by use of non-tax incentives. Top


The Effects of Staff Accountant Objectivity in the Review and Decision Process: A Tax Setting

Richard Charles Hatfield

Abstract

Prior studies report that less experienced staff accountants are often susceptible to confirmation bias in the evaluation of evidence. This bias results in non-objective information evaluation by staff level accountants. This study examines how the perceived objectivity of the staff accountant and the manager's own client advocacy affect the manager's use of the staff accountant's research report when formulating client recommendations. The results suggest that objectivity judgments made by partner/manager level accountants are influenced by whether the staff accountant's research report confirms their initial opinion. Further, the confirmatory nature of the research report affects the manner in which the report is incorporated into a client recommendation. Non-confirming research reports were given more weight than confirming research reports. Preference for client favorable outcomes was found to affect the weight given to staff accountant research reports as well. Top


Experimental Evidence on the Relation Between Tax Rates and Compliance: The Effect of Earned vs. Endowed Income

Scott J. Boylan And Geoffrey B. Sprinkle

Abstract

In this paper, we report the results of an experiment designed to determine whether the manner in which income is obtained (earned vs. endowed) affects the relation between tax rates and taxpayer compliance. Our experiment consisted of an income phase and a tax-reporting phase. In the income phase, participants were either endowed with $20 or were required to earn $20 by performing a one-hour multiplication exercise. In the tax-reporting phase, participants decided how much of their $20 in income to report on their tax returns. Consistent with prior experimental evidence, we find that when income is endowed participants respond to a tax rate increase by reporting less taxable income. In contrast, but consistent with economic theory and some archival-empirical evidence, we find that when income is earned participants respond to a tax rate increase by reporting more taxable income. Collectively, the results suggest that income is not a fungible commodity and that taxpayer responses to changes in policy variables such as the tax rate may depend critically on the amount of time and effort required to generate income. Additionally, our results may help explain differences between the results of taxpayer compliance experiments (which typically endow individuals with income) and archival-empirical studies (which use data that typically include earned income) regarding how changes in the tax rate (and other factors) affect taxpayer compliance decisions. Top

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