Working Papers

Federal Corporate Tax Enforcement and Local Business Activity

with Martin Jacob | September 2022

We examine the consequences of federal corporate tax enforcement for local business activity. U.S. corporate tax return audits have declined significantly in recent years, and recent policies target expanding the number of tax return audits to improve tax revenues. However, tax audits can impose tax and non-tax costs on businesses and have spillover effects on non-audited firms, potentially reducing firm growth. Using cross-sectional variation in U.S. commuting zones’ exposure to firms of different sizes and time-series variation in tax return audit rates across firm size groups, we document that corporate tax enforcement is negatively associated with local business activity, as measured by establishments and employment. These findings are robust to a shift-share specification, falsification tests, and other research designs that address endogeneity and measurement issues. Furthermore, we find the impact of corporate tax enforcement on business activity is stronger in regions in which firms may face higher compliance costs and in which spillover effects between firms are more likely to occur. Finally, we find that the negative association between tax enforcement and business activity is increasing in regional exposure to likely tax avoiders and tax avoidance incentives. Overall, our findings suggest that corporate tax enforcement has both level and distributional consequences for business activity.

Does the U.S. Tax System Favor Superstar Firms?

with Ed Maydew | August 2022

Influential research in economics finds that economic activity is increasingly concentrated in large, highly profitable "superstar firms." The causes and consequences of the rise of superstar firms are the subjects of intense debate among academics, policymakers, and others. Acting on concerns that superstar firms have tax advantages relative to other firms, policymakers are increasingly designing and enacting additional taxes that target superstar firms. We examine the validity of the underlying assumption that the tax system favors superstar firms. Using both forward-looking and backward-looking measures of firms’ tax burdens, we find little empirical evidence that superstar firms are tax advantaged relative to other firms. In contrast, the evidence suggests that tax advantages generally are not an important factor in superstar firms sustaining their dominance, nor do they appear to be an important factor in explaining which firms rise to superstar status.

Tax Planning Knowledge Diffusion via the Labor Market

with John Barrios | Revision requested | August 2022

We examine the extent to which the labor market facilitates the diffusion of tax planning knowledge across firms. Using a novel dataset of tax department employee movements between S&P 1500 firms, we find that firms experience an increase in their tax planning after hiring a tax employee from a tax aggressive firm. This finding is robust to various research designs and specifications. Consistent with tax planning knowledge driving the result, we find that the tax planning benefits are more substantial when the employee is more likely to direct the hiring firm’s tax strategy and has more tax experience. Further tests suggest that tax planning knowledge is highly specific in nature: the increase in tax avoidance is larger when the hiring and former firms are similar (i.e., operating in the same sector or having similar foreign operations), and firms are more likely to hire tax department employees from firms with similar characteristics. Finally, we do not find that the prior firm experiences an increase in their tax planning after the employee leaves the firm, suggesting that the tax planning knowledge simply spreads to the hiring firm and does not leave the prior firm. Our study documents the first-order role of the labor market in the diffusion of tax planning knowledge across firms, and our findings suggest that tax department human capital is a central determinant of tax planning outcomes.

Featured in: NBER Featured Working Paper of the Day (Sept. 2, 2021), Becker-Friedman InstituteChicago Booth Review

Tax Policy Expectations and Investment: Evidence from the 2016 U.S. Election and Tax Cuts and Jobs Act
with Stephan Hollander, Martin Jacob, and Xiang Zheng | Revision requested | December 2021

We examine how tax policy expectations evolve around and shape firms’ investment response to a change in tax policy. Our study is motivated by Hennessy and Strebulaev (2020), who show analytically that bias arising from unmeasured policy expectations can confound inferences regarding the causal impact of a policy change on investment. Using a text-based approach to measuring firms’ tax policy expectations, we document that two recent tax-changing events—namely, the 2016 U.S. election and the Tax Cuts and Jobs Act (TCJA)—affected these expectations in ways that vary considerably across firms and sometimes contrary to often-used conventional assumptions (e.g., uncertainty over tax policy, on average, is found to increase after the election). As for the TCJA, we observe that these event-induced tax policy expectations materially shape investment both before and in response to its passage. Our findings support the idea that firm-level tax policy expectations can affect investment behavior around a change in tax policy, and suggest a methodology that researchers can use to incorporate these policy expectations into their analysis of tax policy.

Who CARES? Evidence on the Corporate Tax Provisions of the Coronavirus Aid, Relief, and Economic Security Act from SEC Filings

with Stephan Hollander and Martin Jacob | June 2020

We use U.S. Securities and Exchange Commission (SEC) filings to provide initial large-sample evidence regarding utilization of corporate tax provisions by U.S. firms under the Coronavirus Aid, Relief, and Economic Security Act (CARES). These tax provisions were intended to provide firms immediate liquidity to prevent widespread bankruptcies and layoffs in response to the COVID-19 pandemic. However, critics have argued that the provisions were poorly targeted and amounted to “giveaways” for shareholders of large corporations. We find that 38 percent of firms discuss at least one of the CARES tax provisions in their SEC filings, a result primarily attributable to the net operating loss (NOL) carryback provision. Firms experiencing lower stock returns during the COVID-19 outbreak are more likely to discuss CARES tax provisions, but not firms in states or industry sectors exhibiting large increases in unemployment. Further, we find a higher likelihood of tax provision discussions for firms with pre-pandemic losses and higher financial leverage. Finally, we document some evidence that firms facing potential reputational or political costs from discussing these tax provisions may have avoided doing so. Our analyses suggest that tax provisions under CARES were not material for most publicly-traded U.S. firms, were not likelier to benefit firms in greater need of liquidity during the pandemic, and that some firms perceived that disclosing benefits would be costly. These findings are important for policymakers as they consider additional economic relief for U.S. corporations while the coronavirus pandemic lingers.

Featured in: Becker-Friedman Institute, BFI COVID Series, Bloomberg Tax