Bank-Tax Conformity for Corporate Income: An Introduction to the Issues

This paper discusses the issues surrounding the proposals to conform financial accounting income and taxable income. The two incomes diverged in the late 1990s with financial accounting income becoming increasingly greater than taxable income through the year 2000. While the cause of this divergence is not known for certain, many suspect that it is the result of earnings management for financial accounting and/or the tax sheltering of corporate income. Our paper outlines the potential costs and benefits of one of the proposed "fixes" to the divergence: the conforming of the two incomes into one measure. We review relevant research that sheds light on the issues surrounding conformity both in the U.S. as well as evidence from other countries that have more closely aligned book and taxable incomes. The extant empirical literature reveals that it is unlikely that conforming the incomes will reduce the amount of tax sheltering by corporations and that having only one measure of income will result in a loss of information to the capital markets.

Barriers to Mobility: The Lockout Effect of U.S. Taxation of Worldwide Corporate Profits

Using data from a survey of tax executives, we examine the corporate response to the one-time dividends received deduction in the American Jobs Creation Act of 2004. We describe the firms’ reported sources and uses of the cash repatriated and we also examine non-tax costs companies incurred to avoid the repatriation tax prior to the Act. Finally, we examine whether firms would repatriate cash again if a similar Act were to occur in the future. Overall, the evidence is consistent with a substantial lockout effect resulting from the current U.S. policy of taxing the worldwide profits of U.S. multinationals.Fuqua School of Business (Duke University)Michigan Ross School of Business (Paton Accounting Fund)University of Washington (Paul Pigott/PACCAR Professorship

A Tale of Two Forecasts: An Analysis of Mandatory and Voluntary Effective Tax Rate Forecasts

We exploit a setting where firms provide two forecasts of the same underlying metric – effective tax rates (ETRs) – to examine the interaction between voluntary and mandatory disclosures. The integral method (ASC 740-270) requires firms to forecast de facto annual ETRs while some firms additionally provide voluntary ETR forecasts in earnings calls. Using a self-constructed dataset of voluntary ETR forecasts, we document that managers are more likely to issue voluntary ETR forecasts when tax complexity is higher. More importantly, voluntary ETR forecasts are incrementally informative over mandatory ETR forecasts as analysts revise their ETR forecasts based on the news in voluntary ETR forecasts, especially for voluntary non-GAAP ETR forecasts and in the presence of discrete tax items. Overall, our results suggest that managers resort to voluntary disclosure when mandatory disclosure constrains their ability to convey private information, thus we offer new insights on the interaction between voluntary and mandatory forward-looking disclosures

Are Online Job Postings Informative to Investors?

Human capital is a key factor in value creation in the modern corporation. Yet the disclosure of investment in human capital is scant. We propose that a company’s online job postings are disclosures made outside of the investor-relations channel that contain forward-looking information that could be informative to investors about future growth. We find that changes in the number of job postings are positively associated with changes in future performance and that this relation is stronger when postings likely represent growth rather than replacement. Consistent with job postings providing new information to the market, investors react positively to changes in the number of job postings. The market reaction to postings is stronger when firms are likely to be hiring for growth rather than replacement and for firms with low labor intensity (and therefore high marginal productivity of labor). This paper was accepted by Brian Bushee, accounting

Who bears the costs of the corporate income tax? Evidence from state tax changes and accounting data

We examine the incidence of the corporate income tax. Tax incidence theory suggests that corporate income taxation affects the supply of capital, resulting in changes to output, demand for supplies and demand for labor (Harberger 1962). Prior studies suggest that shareholders ultimately bear incidence (Gravelle and Smetters 2006). Based on these studies, we first hypothesize that tax changes affect firms’ equity financing, consistent with taxes affecting the supply of capital. Next, we hypothesize that tax changes affect firms’ investment. Third, we hypothesize that consumers, suppliers, employees in addition to shareholders all bear the incidence of the corporate income tax. We also hypothesize that non-state governments bear incidence because firms will avoid more (less) non-state taxes in response to state tax rate increases (decreases). We use difference-in-differences regressions with state corporate income tax changes as plausibly exogenous shocks to test our hypotheses. We find that equity issuances and investment are both responsive to state tax rate increases, but not decreases. Similarly, we find that consumers, suppliers, employees and non-state governments bear incidence following state tax rate increases but not decreases. We also perform several cross-sectional tests and find results consistent with our hypotheses. In an additional test, we find that large tax decreases lead to higher wages, suggesting that labor captures some of the benefits of a tax decrease. Our study contributes to the literature on the incidence of the corporate income tax