American Taxation Association

JATA abstracts - Fall 1993

JATA - Fall 1993

Volume 15, No. 2

New Evidence on the Price Elasticity of Charitable Contributions
Robert C. Ricketts and Peter H. Westfall

An Empirical Investigation of the Relation Between Tax-Loss Selling and the January Effect
Tom Dalton

Taxes and the Timing of Corporate Capital Expenditures
Michael Kinney and Robert H. Trezevant

The Impact of Income Tax Withholding on Taxpayer Compliance: Further Empirical Evidence
Richard A. White, Paul D. Harrison, and Adrian Harrell

Using a Randomized Response Methodology to Collect Data for Tax Compliance Research
Gordon B. Harwood, Ernest R. Larkins, and Jorge Martinez-Vazquez

The Impact of the Stated Interest Rate on Tax Benefits (Costs) in Real Estate Installment Sale Transactions
James P. Angelini, Hassanali Espahbodi and James Volkert


New Evidence on the Price Elasticity of Charitable Contributions

Robert C. Ricketts and Peter H. Westfall

Abstract

We use a random coefficients regression model to estimate the price and income elasticities of individual charitable contributions. The random coefficients model allows for variability among individuals in the degree to which they react to changes in price and income levels. Because separate models are estimated for each individual in the sample, our approach also allows more complete use of all the information in the eight-year Ernst & Young/University of Michigan Individual Taxpayer Panel than has been true in prior studies. In general, the results suggest that changes in income level are much more significant determinants of changes in charitable giving than are changes in price. In fact, the results do not support at all the existence of any meaningful negative price elasticity of charitable giving by individuals. The model estimated here outperforms previously estimated models in tests of predictive ability using a holdout sample from the panel. Top


An Empirical Investigation of the Relation Between Tax-Loss Selling and the January Effect

Tom Dalton

Abstract

This study tests the tax-loss-selling hypothesis as an explanation of the "January effect." The hypothesis is tested by examining the price growth rate in commodity futures contracts before and after the enactment of the Economic Recovery Tax Act of 1981 (ERTA). ERTA requires investors to recognize for tax purposes the unrealized gain or loss on commodity futures contracts at year-end. This tax treatment effectively removes the motivation for investors to sell commodity futures for tax purposes after 1981.

The tax-loss-selling hypothesis predicts that the January effect is present in commodity futures contracts with high tax-loss-selling potential prior to ERTA but disappears after the enactment of ERTA. It also predicts that the January effect is not present in commodity futures with low tax-loss-selling potential either before or after the enactment of ERTA. The study finds support for the tax-loss-selling hypothesis as an explanation of the year-end effect observed in the commodities market prior to the enactment of ERTA. Top


Taxes and the Timing of Corporate Capital Expenditures

Michael Kinney and Robert H. Trezevant

Abstract

Firms maximize the present value of their investment-related tax shields if capital investments that can be flexibly timed around the turn of the tax year are placed in service in the fourth quarter of the current year rather than in the first quarter of the following year. Thus, it is hypothesized that firms make more capital expenditures in the fourth quarter of their current year than in the first quarter of their subsequent tax year. This prediction is supported by empirical tests of 1979 through 1989 capital investment data. Further, this study finds that, as predicted by debt securability, high-tax firms issue long-term debt in a pattern that coincides with the timing of their capital expenditures. Top


The Impact of Income Tax Withholding on Taxpayer Compliance: Further Empirical Evidence

Richard A. White, Paul D. Harrison, and Adrian Harrell

Abstract

Prospect theory predicts that an individual's income tax withholding position (additional tax due versus a tax refund) at the time of filing the annual return affects taxpayer compliance behavior. Prior research has produced mixed results. The present research was designed to further clarify this issue by determining the impact a taxpayer's withholding position has on the individual's tax compliance decision across low, medium, and high detection rates and penalties. Adult taxpayers were compared to undergraduate students to determine if the compliance behavior of experienced and inexperienced tax return filers is similar.

The results indicate that subjects in a tax due position are more likely to engage in noncompliant behavior than subjects who are in a tax refund position. In contrast to other studies, a withholding effect was found at higher detection rates but was not found at the low detection rate for low and medium penalty amounts. In addition, adult taxpayers engaged in more noncompliant behavior than did undergraduate students, although both groups' compliance decisions were affected by withholding position. Top


Using a Randomized Response Methodology to Collect Data for Tax Compliance Research

Gordon B. Harwood, Ernest R. Larkins, and Jorge Martinez-Vazquez

Abstract

Individuals often hesitate to respond to survey questions that deal with sensitive or embarrassing topics. Those who do respond often respond untruthfully. The randomized response (RR) method was developed to mitigate the effect of these two types of biases. Although RR has been used extensively in social science research, only one published study has used the technique in tax compliance research. To encourage its use in this area, this paper reviews many of the designs used in prior RR studies. In addition, one RR technique is illustrated with a question from an exploratory study completed by the authors. Finally, an agenda for future tax compliance research using RR methodology is suggested. Top


The Impact of the Stated Interest Rate on Tax Benefits (Costs) in Real Estate Installment Sale Transactions

James P. Angelini, Hassanali Espahbodi and James Volkert

Abstract

In this paper we present models for both the buyer and the seller in a real estate installment sale transaction. These models can be used to determine the impact of changes in the stated interest rate on the present value of tax benefits for the buyer and tax costs to the seller. We show that once the parties agree on the timing and amount of cash flows, the tax benefits and costs in an installment sale transaction can be altered by changing the stated interest rate and thus the selling price. The optimum stated interest rate depends on several factors, including the length of the installment note and the capital gain tax rate.

These models are predicated on Scholes and Wolfson's (1992) finding that installment sales have little impact on turnover and market value of real estate following the 1986 Tax Act and indicate that, absent a substantial preferential capital gain tax rate, above-market-rate installment sales often provide tax avoidance opportunities. Thus tax policy makers should consider specifying a maximum interest rate for real estate installment sale transactions if they feel the potential for tax avoidance is significant enough to warrant further regulation. In addition, the necessity of the existing imputed interest rules should be reconsidered. Top

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