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Working Papers

Does the Tax System Favor Superstar Firms?

with Ed Maydew | March 2023

Influential research finds that economic activity is increasingly concentrated in large, highly profitable "superstar firms," potentially leading to adverse outcomes such as decreased competition and entrenchment. Acting on concerns that the tax system favors superstar firms, policymakers are increasingly targeting superstar firms with tax increases. We test the validity of the underlying assumption that superstar firms are tax advantaged, using both forward-looking and backward-looking tax burden measures. Overall, we find little evidence that superstar firms systematically pay lower taxes than their non-superstar competitors or smaller profitable firms, casting doubt on the idea that the tax system favors superstar firms.

Corporate Tax Planning and Industry Concentration

with Jesse van der Geest, Martin Jacob, and Christian Peters | March 2023

Recent research has documented that industry concentration has increased significantly over the past 25 years, with potentially negative consequences for competition, productivity, and social welfare. Some policymakers have suggested that greater corporate tax planning by industry leaders, which can provide them with a cost advantage over their competitors, has contributed to this trend. We provide large-sample empirical evidence on whether tax planning is associated with industry concentration. In contrast with conventional wisdom, we find that industry leaders generally do not exhibit greater tax planning relative to their closest competitors. Furthermore, industry tax planning dynamics do not always lead to, nor do they explain the trend in, increased concentration. Finally, we document that industries with plausibly tax planning-induced concentration do not exhibit different productivity growth than other industries. In short, our findings cast doubt on the idea that tax planning by industry leaders is responsible for increasing market concentration or other anti-competition industry-level outcomes in recent years.

Tax-induced Organizational Complexity and Executive Performance Measurement

with Eva Labro and Ginger Scanlon | January 2023

We examine how tax-induced organizational complexity is associated with executive performance measurement. We define tax-induced organizational complexity (“TIOC”) as the complexity in organizational structures that would not exist in a zero-tax world. While these structures can lead to lower tax burdens, top-level executives need to manage the associated complexity to avoid potential negative consequences, and thus firms with greater TIOC may design their performance measurement systems with this complexity in mind. Using firms’ subsidiary structures in tax havens and other low tax countries to measure TIOC, we find that greater TIOC is associated with multiple aspects of executive performance measurement. First, we find that TIOC is positively associated with the number of unique measures used for each executive and lower similarity in measures used across the top executive team, consistent with TIOC creating heterogenous activities that top managers need to monitor and manage in support of optimizing taxes. Second, we find TIOC is associated with a greater propensity to use adjusted performance metrics, consistent with firms correcting standard metrics for any noise and bias introduced by TIOC and its associated tax planning. Third, TIOC is positively associated with longer-term performance measurement, consistent with boards wanting executives to manage both the short-run tax benefits and potentially longer-run costs associated with TIOC. Our study contributes to the tax and managerial accounting literatures by creating an empirical measure of TIOC and shedding light on how firms manage TIOC via performance measurement.

Federal Corporate Tax Enforcement and Local Business Activity

with Martin Jacob | January 2023

We examine the consequences of federal corporate tax enforcement for local business activity, and in particular whether (i) these consequences vary across regions and firms and (ii) tax enforcement has spillover effects. Exploiting geographic variation in exposure to firms of different sizes and variation in tax return audit rates across firm size groups, we first document that corporate tax enforcement is negatively associated with regional business activity. More interestingly, we document substantial heterogeneity in this association. We find that tax enforcement has spillover effects, as indicated by a stronger negative effect in urban areas and in regions with more vertically-related business activity. The negative association is also greater in regions in which firms likely face higher compliance costs and have less access to external capital. Our findings collectively suggest that the effects of tax enforcement on business activity are highly heterogeneous, which should be of interest to academics and policymakers.

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 | December 2022

We examine how firms’ tax policy expectations (TPE) evolve around and affect their investment response to a change in tax policy. This examination is motivated, in part, by Hennessy and Strebulaev (2020), who show analytically the importance of accounting for policy expectations in empirical tests purporting to capture the causal impact of a policy change. Using a text-based approach to measuring TPE, we document that two tax-changing events—namely, the 2016 U.S. election and the Tax Cuts and Jobs Act (TCJA)—spawned considerable within-industry and within-year variation in TPE, sometimes going against often-used conventional assumptions in prior research. Furthermore, we observe that event-induced TPE materially affects investment both before and in response to the TCJA’s passage in 2017, with its first and second moments having offsetting effects. Finally, we find that domestic firms differ from multinational firms in their investment response to TPE, with the former (latter) more likely to adjust the level (shift the country location) of their investment. Overall, our findings strongly support the idea that TPE can affect investment behavior around a tax policy change, and suggest that our methodology can be used by future research to study and incorporate TPE into their analysis of tax policy effects.

Other Papers

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

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