A review of tax research

Abstract

Abstract:In this paper, we present a review of tax research. We survey four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research. ______________________This paper was prepared for the 2009 Journal of Accounting and Economics Conference. We appreciate comments from Scott Dyreng, Mihir Desai (discussant), S.P. Kothari (editor), John Long, Ed Maydew, Lillian Mills, Tom Omer, Sonja Rego, Doug Shackelford, Terry Shevlin, Joel Slemrod, Cliff Smith, David Weber, Ryan Wilson, Jerry Zimmerman, George Zodrow, and conference participants at the JAE Conference as well as at the 2009 University of North Carolina Tax Symposium and the discussant there, Bill Gentry. All errors and omissions are our own. * Corresponding author: 100 Main Street, Cambridge, MA. email: mhanlon@mit.edu. 1 A Review of Tax Research IntroductionIn this paper, we review tax research in accounting as well as tax research in economics and finance to the extent that it is related to or is affected by research in accounting. Shackelford and Shevlin (2001) provide a careful and thorough review of empirical tax research in accounting in the prior Journal of Accounting and Economics review volume. Shackelford and Shevlin limit their review to research published in accounting outlets and describe the development of the relatively young archival, microeconomic-based income tax literature that arose from the Scholes andWolfson framework. In his discussion of the review, Maydew (2001) emphasizes the need for tax researchers in accounting to think more broadly and to incorporate more theory and evidence from economics and finance. We agree. Tax research has a long history in many disciplines; this fact cannot be ignored. Our goal in this paper is to integrate the theoretical and empirical tax research from accounting, economics, and finance, to summarize what is known and unknown, and to offer suggestions for future research.The multidisciplinary nature of tax research is what makes tax research exciting (yes, exciting), yet difficult. Tax research can be difficult not only because one has to follow tax studies in accounting, finance, economics, and law (through academic institutions, governmental agencies, and policy think tanks), but also because different disciplines often use different languages and have different perspectives. 1 For example, economists generally focus on tax compliance, tax incidence (such as who bears the corporate tax), investment and economic growth effects (such as how taxes 1 Slemrod (1992a) characterizes these differences as economists studying what corporations actually do and accountants stud...

Tax Rate Biases in Tax Planning Decisions: Experimental Evidence

“…Firms that rely on salient average tax rates rather than on more accurate marginal tax rates experience substantial financial losses. Taken together, these results indicate that tax-rate salience could lead to economically suboptimal decisions and contribute to heterogeneity in ETRs and the undersheltering puzzle (Dyreng et al 2008, Hanlon andHeitzman 2010).…”

“…While firms use tax-planning strategies to reduce their ETRs, the extent of tax planning tends to fall short of theoretical predictions given the vast spectrum of opportunities to save on taxes (Hanlon and Heitzman 2010). 4 Against this background, we know surprisingly little about the behavioral dimension of tax-planning decisions.…”

“…Dyreng, Hanlon, and Maydew (2008), for instance, provide evidence that firms' effective tax rates (ETRs) differ considerably and a quarter of the firms in their sample persistently pay taxes in excess of the statutory U.S. corporate tax rate. In accounting research, the term "undersheltering puzzle" was coined for this phenomenon (Gallemore, Maydew, and Thornock 2014, Hanlon and Heitzman 2010, Desai and Dharmapala 2006, Weisbach 2002. As the causes of the undersheltering puzzle are yet not entirely clear (Hanlon and Heitzman 2010), we examine whether and under which conditions heuristics lead to biases in tax-planning decisions that result in economically suboptimal decisions.…”

“…In accounting research, the term "undersheltering puzzle" was coined for this phenomenon (Gallemore, Maydew, and Thornock 2014, Hanlon and Heitzman 2010, Desai and Dharmapala 2006, Weisbach 2002. As the causes of the undersheltering puzzle are yet not entirely clear (Hanlon and Heitzman 2010), we examine whether and under which conditions heuristics lead to biases in tax-planning decisions that result in economically suboptimal decisions. Because economically suboptimal tax planning impairs a firm's competitiveness, investment and growth (Donohoe, Lisowsky, and Mayberry -2 -2015), a more profound understanding of tax-planning decisions is required.…”

Book-Tax Income Differences and Major Determining Factors

“…Permanent differences are not associated with accrual management. Thus, Seidman may use temporary BTDs to examine the effect of earnings management (Hanlon and Heitzman 2010). Appendix includes a summary of studies on BTDs.…”