JATA - Spring 1992

Volume 14, No. 1

Taxes, Investment-Related Tax Shields and Capital Structure

Dan Dhaliwal, Robert Trezevant and Shiing-wu Wang


DeAngelo and Masulis (1980) predict that in cross-sectional analysis firms with higher investment-related tax shields (holding before-tax earnings constant) will employ less debt in their capital structure due to the positive relation between investment-related tax shields and the probability of losing the deductibility of debt tax shields. This study finds strong empirical support for this substitution effect hypothesis after controlling for the following: the probability of losing the immediate deductibility of tax shields, the debt securability effect, the production technology effect, and other factors identified in prior cross-sectional studies of the determinants of capital structure.

An Empirical Investigation of the Association of Productivity with Employee Stock Ownership Plans

Amy E. Dunbar and Subal C. Kumbhakar


This paper investigates whether employee participation in ownership through an employee stock ownership plan (ESOP) is positively associated with productivity measures. This issue is an appropriate tax policy concern because, although ESOPs were introduced into the law for the primary purpose of broadening the ownership of wealth, it was expected that ESOPs would also lead to increased productivity. Production functions augmented with binary variables for various retirement plans, including ESOPs, were estimated using panel data procedures. The contention that participation in ownership leads to efficiency gains was not generally supported; however, predictions that participation in ownership leads to inefficiencies were not supported in any estimation.

Investors' Assessment of the Importance of Tax Incentives in Locating Foreign Export-Oriented Investment:  An Exploratory Study

Robert J. Rolfe and Richard A. White


This study provides additional evidence regarding how investors perceive the importance of selected tax incentives relative to several nontax incentives in making specific investment location decisions. The decision modeling approach used in the study overcomes limitations inherent in prior survey and econometric studies. Managers involved in offshore export-oriented investment decisions were asked to assess the relative importance of two tax factors (tax holiday and import duty exemptions) and three nontax factors (wage, rate, quality of infrastructure, and host country dividend remittance policy) in their decision to locate a light manufacturing operation in the Caribbean Basin. The results indicate that tax incentives alone were not able to overcome unfavorable nontax factors. However, in cases in which the nontax factors were generally favorable, the evidence suggests that the two tax variables were likely to have an influence in the location decision.

"The Corporate Tax Comeback in 1987"--Some Further Evidence

Terry Shevlin and Sue Porter


In a series of reports issued prior to the Tax Reform Act of 1986 (TRA 86), Citizens for Tax Justice (CTJ) questioned the equity of the U.S. tax system. In particular, CTJ asserted that very large U.S. corporations were not paying their "fair share" of taxes and supported its assertion with computations of effective tax rates (ETR) for a sample of 250 large U.S. corporations. In a study published subsequent to TRA 86, CTJ reports an increase in the 1987 average federal ETR for a sample of 250 large corporations and concludes that "the principal finding of this report is that tax reform is working" (1988, 9). The General Accounting Office (1990) also reports an increase in 1987 ETRs for a sample of large U.S. corporations but warns that more than one year of data should be analyzed and an evaluation of how ETRs change when additional income is earned should be undertaken. We address these and other issues. We extend the period studied to 1988 and 1989 and a decompose observed changes in ETRs into an income effect, a tax rate effect, and a tax rule effect. Our analyses indicate that the observed changes in ETRs are largely due to the base-broadening tax rule changes in TRA 86 dominating the statutory tax rate reductions and changes in forms' income from pre- to post-TRA. Thus these results generally lend credence to CTJ's assertions that TRA 86 led to increased ETRs.

Taxes and Firm Size:  The Effect of Tax Legislation During the 1980s

Beth B. Kern and Michael H. Morris


The Tax Reform Act of 1986 significantly changed the corporate tax structure with the objective of shifting $120 billion of taxes from individuals to corporations. This development, in addition to the conflicting results of previous research, prompts a new look at the relation between firm size and effective tax rates. The annual results for 1971 through 1989 suggest that the significant differences in effective tax rates between large and small firms that had existed prior to the Tax Reform Act of 1986, as originally found in Zimmerman (1983) and Procano (1986), had largely dissipated across and within one-digit SIC industries by the end of the decade. The results also suggest that Porcano's (1986) findings are quite sensitive to the choice of the Valueline or Compustat data base, whereas Zimmerman's (1983) study was robust with respect to that choice. These results not only shed light on the conflicting results in prior studies, but also have important implications for future tax policy decisions and for accounting choice studies that have emphasized the importance of the corporate tax component in the political cost hypothesis.

Empirical Evidence of Implicit Taxes in the Corporate Sector

Patrick J. Wilkie


The Federal government has enacted special tax provisions that are estimated to cost the Treasury more than $200 billion year. The purpose for many of these tax incentives is to induce firms to alter their investment, production, and financing decisions away from the pre-tax optimum established by the private market, and toward an equilibrium that the government deems to yield greater social welfare. This induced reallocation of resources away from the pre-tax optimum is hypothesized to cause firms to suffer reductions in pre-tax optimum is hypothesized to cause firms to suffer reductions in pre-tax return that are referred to as implicit taxes. Thus, in order to achieve a more desirable equilibrium, the Federal government provides firms with opportunities to reduce explicit taxes (increase tax subsidies), and competition among firms for the right to reduce their explicit taxes results in anticipated increases in implicit taxes (reductions in pre-tax return).

This paper provides empirical evidence on the cross-firm and through-time relations between pre-tax return and tax subsidy for the 818 firms during the 1968-85 period. The results are consistent with the predictions of the implicit tax hypothesis, showing a consistent and statistically significant inverse relation between pre-tax return and tax subsidy. However, the empirical relation is weaker than predicted for a perfectly competitive and frictionless economy, which suggests the presence of nontrivial market frictions or systematic measurement error.

Letter from the President

To ATA Members and Visitors,

The American Taxation Association (ATA) is home to a broad group of members with interests in tax research, policy, practice, and education. We are in a time of transition that includes the ongoing pandemic; both AAA’s and ATA’s Diversity, Equity, and Inclusion initiatives; and the CPA Evolution. I thank our members Kirsten Cook, Diana Falsetta, and Annette Nellen for their service in these endeavors. I also thank Tim Rupert for his service as AAA Director focusing on Segments.

Our last mid-year meeting was virtual and could not have happened without our excellent ATA leadership. Thank you to Jeri Seidman, Mollie Adams, Bridget Stromberg, and their respective committees for their flexibility and tenacity in organizing their portions of the conference...

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Anna Catherine Fowler

In Memoriam,
Anna Catherine Fowler received her BS in accounting from the University of Alabama, after which she practiced for several years as a CPA. After moving to Texas with her husband Jim, she earned her MBA and PhD from the University of Texas at Austin.

She joined the faculty of the business school of the University of Texas in 1977 as the first female tenure track professor hired by the accounting department. She remained at UT until she retired in 2004 as the John Arch White Emeritus Professor in Business.

During Anna’s distinguished academic career, her research and teaching interests focused on estate and gift taxation. She was an active member of the AICPA’s Tax Division and the American Taxation Association, for which she served as 1993-94 president.

In 2002, Anna received the American Taxation Association’s highest honor, the Ray M. Sommerfeld Outstanding Tax Educator Award. She also received the Texas Society of CPA’s Outstanding Educator Award.

Anna and Jim made the most of their retirement years, delighting in travel all over the world. They finally settled in a retirement community in Chapel Hill, North Carolina. Even after Jim’s death in 2019, Anna continued to travel with friends, root for her beloved Alabama football team, and live her life to the fullest. She passed away peacefully on October 19, 2021.

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