American Taxation Association

JATA abstracts - Fall 2002

JATA - Fall 2002

Volume 24, No. 2

Measuring Corporate Tax Preferences
Amy E. Dunbar and Richard C. Sansing

The Impact of Firm Characteristics on Book-Tax-Conforming and Book-Tax-Difference Audit Adjustments
K. Hung Chan and Phyllis L. L. Mo

The Influence of Firm Maturation on Tax-Induced Financing and Investment Decisions
Jeffrey A. Pittman

The Impact of Embedded Intelligent Agents on Tax-Reporting Decisions
John J. Masselli, Robert C. Ricketts, Vicky Arnold and Steve G. Sutton

The Perceived Fairness of Taxing Social Security Benefits: The Effect of Explanations Based on Different Dimensions of Tax Equity
James J. Maroney, Timothy J. Rupert and Martha L. Wartick


Measuring Corporate Tax Preferences

Amy E. Dunbar and Richard C. Sansing

Abstract

This paper examines the measurement of corporate tax preferences. It develops a model of corporate investment in which a certain fraction of the investment is immediately expensed. This model is representative of the treatment of costs associated with internally developed intangible assets, which generally are expensed for both financial reporting and tax purposes. Analysis of the model shows that accounting-based measures of tax preferences are deficient because such measures detect only tax preferences that generate book-tax differences. The paper then proposes a new measure in which pre-tax accounting income is replaced by pre-tax stock market returns, which detects tax-favored investments regardless of their financial accounting treatment. A comparison of the two measures for a sample of firms between 1992 and 1996 indicates that tax preferences are substantially higher than accounting-based measures suggest.  Top


The Impact of Firm Characteristics on Book-Tax-Conforming and Book-Tax-Difference Audit Adjustments

K. Hung Chan and Phyllis L. L. Mo

Abstract

This study empirically investigates the differential impact of firm characteristics on book-tax-conforming and book-tax-difference noncompliance. Tax noncompliance is measured in terms of tax audit adjustments made by tax authorities in response to the violation of tax laws. We decompose the tax audit adjustments into book-tax-conforming adjustments (adjustments that affect both book and tax incomes) and book-tax-difference adjustments (adjustments that affect only tax income) using archival tax audit data. Based on the decomposed noncompliance, we explicitly examine the tax and nontax cost trade-off for exporters and high-tech companies when they underreport both book and tax incomes. Our results indicate that export-oriented and high-tech companies, respectively, have larger book-tax-conforming adjustments but smaller book-tax-difference adjustments than domestic-market-oriented and non-high-tech companies. Our study contributes to the literature by further explaining the determinants of corporate-tax noncompliance, and is the first to provide archival evidence of tax noncompliance on such a decomposed basis. These archival evidences on noncompliance help us understand more about the incentives or disincentives for corporations to comply with tax laws. Our results also offer guidance for public policy makers, especially those in developing economies, to design their tax policies to attract foreign investment, and for tax authorities to plan more effective and efficient tax audits.  Top


The Influence of Firm Maturation on Tax-Induced Financing and Investment Decisions

Jeffrey A. Pittman

Abstract

Empirical evidence that taxes influence firms' capital structures has been elusive. Scholes and Wolfson (1989) argue that refinancing costs that accumulate with age affect the time-series variation in firms' tax-induced financing and investment policies. Specifically, they predict that as capital structures gradually become more constrained over time, firms' financing decisions will become less sensitive to their marginal tax rates; and that as firms are increasingly impeded from adjusting their capital structures, they will resort to relying more on investmentrelated tax shields. This study examines panel data spanning firms' first nine public years that provides strong, robust evidence that the evolution in debt and asset tax shields is consistent with Scholes and Wolfson's (1989) predictions. In separate tests, age is measured from a firm's initial public offering and from its incorporation to consider whether the duration of their public and private existence, respectively, affects tax shield choice.  Top


The Impact of Embedded Intelligent Agents on Tax-Reporting Decisions

John J. Masselli, Robert C. Ricketts, Vicky Arnold and Steve G. Sutton

Abstract

The use of tax preparation software to meet federal tax-reporting requirements has dramatically increased in the last decade. The general assumption is that such software improves the accuracy of taxpayers' returns, in part because embedded intelligent agents identify potential form errors, provide interpretations of tax laws, and highlight potential IRS audit flags. However, it is possible that these intelligent agents may have other, unintended effects as well. In particular, it is likely that the audit warnings embedded in many of these products may cause many taxpayers to take more conservative positions in their tax returns. Taxpayers most likely to be affected in this way are those who are relatively less knowledgeable about tax laws and reporting requirements.

This study presents the results of a computerized tax experiment that are consistent with the above expectations. For novice taxpayers, the audit flags embedded in the software led to conservative adjustments that are rather extreme, resulting in significantly higher reported taxable incomes relative to their counterparts who did not have access to the embedded audit flags. Knowledgeable taxpayers, in contrast, maintained essentially the same level of taxable income and corresponding tax liability despite software warnings of potential audit.  Top


The Perceived Fairness of Taxing Social Security Benefits: The Effect of Explanations Based on Different Dimensions of Tax Equity

James J. Maroney, Timothy J. Rupert and Martha L. Wartick

Abstract

In this study, we construct explanations for the taxation of social security benefits based on previously identified dimensions of fairness (exchange, horizontal, and vertical equity). We then conduct an experiment to examine whether providing senior citizen taxpayers with explanations increases the perceived fairness of taxing social security. The results indicate that for those subjects with the greatest self-interest (subjects currently taxed on a portion of their social security benefits), the exchange equity explanation had the most consistent positive effects on both acceptance of the explanation and on the perceived fairness of taxing social security benefits. On the other hand, for those subjects not currently taxed on their social security benefits, the vertical equity explanation was more likely to be accepted than either the exchange or horizontal equity explanation. However, while these subjects agreed with the vertical equity explanation, it did not increase their fairness perceptions. These findings illustrate how important it is for tax policy makers striving to increase perceptions of fairness to carefully consider and develop explanations for tax provisions.  Top

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