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American Taxation Association |
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American Taxation Association |
JATA - Spring 2000Volume 22, No. 1 Equity Security Investments:
Evidence on Tax-Induced Dividend Clienteles The Effect of the Tax Deductibility
of Goodwill on Purchase Price Allocations The Influence of Tax Costs on
Organizational Choice in the Natural Resource Industry A Closer Examination of the
Economic Incentives Created by Tax Return Preparer Penalties Multiple Taxpayers and Litigation
Cost Reimbursement Rules An Evaluation of Alternative Procedures
for Measuring Horizontal Inequity The Effect of Political Affiliation
on Taxpyers’ Attitudes Toward Alternative Tax Systems Equity Security Investments: Evidence on Tax-Induced Dividend Clienteles Gregory G. Geisler Abstract This study examines the formation of tax-induced dividend clienteles in equity security holdings by life insurance companies (LICs). Generally, corporations are allowed a 70% deduction against dividends received from portfolio stocks. In contrast, LICs are only allowed a "prorated" dividends-received deduction (DRD) that ranges between 0% and 70%. So, even with similar levels of profitability, the marginal tax rate on dividend income effectively varies across LICs. This setting provides a unique opportunity to isolate and examine the effect of taxes on dividend clientele formation. Cross-sectional regression is used to analyze the relation between the prorated DRDs and the average dividend yield on equity holdings. Controls are added for other determinants of equity investment behavior. The results show that LICs prorated DRDs significantly influence their average dividend yield on equity investments, providing direct evidence that investment behavior is consistent with tax-induced dividend clientele formation. Top The Effect of the Tax Deductibility of Goodwill on Purchase Price Allocations Steven L. Henning and Wayne H. Shaw Abstract This paper examines whether changes in the tax deductibility of goodwill affected the pricing of acquisitions during the early 1990’s. We find that tax deductibility led to a change in purchase price allocations across asset groups, since an increase in the amount allocated to goodwill was offset by a decrease in the allocation to identifiable assets. Our evidence also suggests that some of the benefits accrued to the target since purchase price increased after the change in the tax status of goodwill. The failure to observe any change in the level or allocation of the purchase price for the tax carryover firms provides additional support that the change for step-up firms was attributable to changes in the tax law and not to other factors. Top The Influence of Tax Costs on Organizational Choice in the Natural Resource Industry Thomas C. Omer, George A. Plesko, and Marjorie K. Shelley Abstract This study investigates the influence of TRA86, pre-TRA86 tax strategies, and firm characteristics on S conversions in the natural resource industry. TRA86 shifted substantial individual tax costs to corporations, inviting conversions, but also lowered corporate marginal tax rates and changed aspects of the built-in gain provision to reduce conversion benefits. Built-in gain changes affect industries differently because of differences in asset composition and economic conditions. The natural resource industry had substantial built-in gain potential and was consolidating and restructuring during the mid-80s, making built-in gain realization likely. Our results suggest that built-in gains negatively influenced conversions in the natural resource industry. This study enhances our understanding of the interaction between TRA86 rate changes and other provisions on incentives to convert from C to S status. It also contributes to the organizational form literature by identifying factors related to TRA86, S operating restrictions, firm characteristics, and tax strategies that influence conversion decisions. Top A Closer Examination of the Economic Incentives Created by Tax Return Preparer Penalties Susan E. Anderson and Andrew D. Cuccia Abstract This paper clarifies and extends prior research examining the potential effectiveness of tax preparer penalties by isolating the economic incentives such penalties create from other, potentially conflicting, influences, by examining a wider range of services such penalties might impact, and by explicitly considering the moderating influences of market and institutional factors. Unlike prior studies, we explicitly recognize that (1) increasing penalties provides incentives for practitioners to identify fewer tax-reducing opportunities and increase their fees as well as reduce the aggressiveness of their reporting recommendations, and (2) these incentives are moderated by the levels of competition and moral hazard in the environment. Experimental markets were constructed in which subjects sold and provided a mix of tax services under different penalty, competition, and moral hazard levels. Contrary to the reported findings of much prior research, we provide evidence of an impact of penalty increases on practitioner behavior. Further, we find the effect of the penalty increase varies across levels of competition and moral hazard as predicted. Top Multiple Taxpayers and Litigation Cost Reimbursement Rules Sung-Soo Yoon Abstract My study examines whether the existence of multiple taxpayers who have similar cases will affect the settlement/litigation decisions of the Internal Revenue Service (IRS). It also investigates whether changes in tax laws that reduce taxpayers’ litigation cost burden will encourage the IRS to settle more tax cases. I find that the existence of just two taxpayers can make the IRS prefer a trial to a settlement even when the IRS would settle if there were a single taxpayer. I also find that changes in litigation cost reimbursement rules favoring taxpayers will not lead to more settlements as expected. Instead, such changes can result in more trials. Litigation cost reimbursement rules decrease taxpayers’ total burden in general, but could increase that of those who have strong cases in some settings. Top An Evaluation of Alternative Procedures for Measuring Horizontal Inequity Govind S. Iyer and Ananth Seetharaman Abstract In this study we evaluate the strengths and limitations of three distinct methods for measuring horizontal inequity (HI): the coefficient of variation method, the rank preservation method, and the decomposition method. By way of illustrating the alternative measures, we assess the equity characteristics of three proposed flat tax systems. We conclude that the rank preservation and decomposition methods, while subject to certain limitations, yield HI indices that are more meaningful and convenient than the popular coefficient of variation technique. Preliminary results indicate that the current U.S. individual income tax system yields less HI than any flat tax proposal. Among the flat tax proposals, the rank preservation and decomposition methods show that the Armey proposal yields the least HI. We also document that the flat tax proposal that yields the most horizontal equity yields the least vertical equity, and vice versa, suggesting an inherent trade-off between the goals of horizontal and vertical equity for the flat tax. Top The Effect of Political Affiliation on Taxpyers’ Attitudes Toward Alternative Tax Systems John McGowan Abstract There is a great deal of dissatisfaction with the existing tax system. Prior research has found that self-interest, perceived equity, persuasive messages, tax knowledge, and demographic factors affect taxpayer attitudes. This study contributes to that body of research by examining the effects of another factor that is associated with taxpayer attitudes: their political affiliation. Data obtained from a national telephone survey of homeowners’ attitudes towards alternative tax systems are used. Results indicate that political affiliation plays a significant role in taxpayers’ attitudes towards both alternative tax systems in general and the proposed flat tax in particular. Specifically when faced with a choice of alternative tax systems, respondents who identified themselves as having Republican (Democratic, Independent) political affiliations were more (less) likely to prefer both the flat tax and sales tax systems over the current system. Top |