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Abstract:
This paper traces the development of archival, microeconomic-based, empirical income tax research in accounting over the last fifteen years. The paper details three major areas of research: (i) the coordination of tax and non-tax factors, (ii) the effects of taxes on asset prices and (iii) the taxation of multijurisdictional (international and interstate) commerce. Methodological concerns of particular interest to this field also are discussed. The paper concludes with a discussion of possible directions for future research.

Abstract:
This paper traces the development of archival, microeconomic-based, empirical income tax research in accounting over the last fifteen years. The paper details three major areas of research: (i) the coordination of tax and non-tax factors, (ii) the effects of taxes on asset prices and (iii) the taxation of multijurisdictional (international and interstate) commerce. Methodological concerns of particular interest to this field also are discussed. The paper concludes with a discussion of possible directions for future research.

Abstract:
We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and S&P 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, the median marginal tax rate is 31 percent when option deductions are ignored but falls to 5 percent when one accounts for the deductions. For S&P firms, however, option deductions do not affect marginal tax rates to a large degree. In the spirit of DeAngelo and Masulis (1980), option deductions are important nondebt tax shields that can affect corporate policies. We find evidence consistent with option deductions substituting for interest deductions in corporate capital structure decisions. This evidence explains in part why some firms appear to be underlevered.

Abstract:
We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and S&P 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, including the effect of options reduces the estimated median marginal tax rate from 31 percent to 5 percent. For S&P firms, in contrast, option deductions do not affect marginal tax rates to a large degree. Our evidence suggests that option deductions are important nondebt tax shields and that option deductions substitute for interest deductions in corporate capital structure decisions, explaining in part why some firms use so little debt.

capital structure, corporate taxes, debt policy, employee stock options, option deductions

Abstract:
Mutual funds must disclose their portfolio holdings to investors semiannually. The costs and benefits of such disclosures are a long-standing subject of debate. For actively managed funds, one cost of disclosure is a potential reduction in the private benefits from research on asset values. Disclosure provides public access to information on the assets that the fund manager views as undervalued. This paper tries to quantify this potential cost of disclosure by testing whether "copycat" mutual funds, funds that purchase the same assets as actively-managed funds as soon as those asset holdings are disclosed, can earn returns that are similar to those of the actively-managed funds. Copycat funds do not incur the research expenses associated with the actively- managed funds that they are mimicking, but they miss the opportunity to invest in assets that managers identify as positive return opportunities between disclosure dates. Our results for a limited sample of high expense funds in the 1990s suggest that while returns before expenses are significantly higher for the underlying actively managed funds relative to the copycat funds, after expenses copycat funds earn statistically indistinguishable, and possibly higher, returns than the underlying actively managed funds. These findings contribute to the policy debate on the optimal level and frequency of fund disclosure.

Abstract:
Mutual funds must disclose their portfolio holdings to investors semiannually. The costs and benefits of such disclosures are a long-standing subject of debate. For actively managed funds, one cost of disclosure is a potential reduction in the private benefits from research on asset values. Disclosure provides public access to information on the assets that the fund manager views as undervalued. This paper tries to quantify this potential cost of disclosure by testing whether "copycat" mutual funds, funds that purchase the same assets as actively-managed funds as soon as those asset holdings are disclosed, can earn returns that are similar to those of the actively-managed funds. Copycat funds do not incur the research expenses associated with the actively-managed funds that they are mimicking opportunity to invest in assets that managers identify as positive return opportunities between disclosure dates. Our results for a limited sample of high expense funds in the 1990s suggest that while returns before expenses are significantly higher for the underlying actively managed funds relative to the copycat funds, after expenses copycat funds earn statistically indistinguishable, and possibly higher, returns than the underlying actively managed funds. These findings contribute to the policy debate on the optimal level and frequency of fund disclosure.

Abstract:
Mutual funds must disclose their portfolio holdings to investors semiannually. The costs and benefits of such disclosures are a long-standing subject of debate. For actively managed funds, one cost of disclosure is a potential reduction in the private benefits from research on asset values. Disclosure provides public access to information on the assets that the fund manager views as undervalued. This paper tries to quantify this potential cost of disclosure by testing whether "copycat" mutual funds, funds that purchase the same assets as actively-managed funds as soon as those asset holdings are disclosed, can earn returns that are similar to those of the actively-managed funds. Copycat funds do not incur the research expenses associated with the actively-managed funds that they are mimicking, but they miss the opportunity to invest in assets that managers identify as positive return opportunities between disclosure dates. Our results for a limited sample of high expense funds in the 1990s suggest that while returns before expenses are significantly higher for the underlying actively managed funds relative to the copycat funds, after expenses copycat funds earn statistically indistinguishable, and possibly higher, returns than the underlying actively managed funds. These findings contribute to the policy debate on the optimal level and frequency of fund disclosure.

mutual funds, disclosure regulation, intellectual property, patents

Abstract:
This paper provides a comprehensive review of Accounting for Income Taxes (AFIT). The first half of the paper provides background and a primer on AFIT. The second half reviews existing studies in detail and makes suggestions for future research. We emphasize the research questions that have been addressed (most of it related to whether the tax accounts are used to manage earnings, and whether the tax accounts are priced in capital markets) and also highlight the areas that to date have not received much research attention. We draw six broad conclusions regarding AFIT research: (1) a comprehensive theoretical framework for interpreting and guiding empirical AFIT studies does not exist; (2) an apparent inconsistency exists between empirical findings that suggest the tax information in the financial statements is useful and the practitioner view that the data are of poor quality; (3) future research should study the disaggregated components of book-tax differences to better explain the underlying causes; (4) we need to better understand whether some empirical findings imply market inefficiency or whether they are driven by market imperfections; (5) the extant empirical research does not take full advantage of panel data econometric techniques and hence it is likely that some of the existing results are overstated; and (6) research opportunities may present themselves as the U.S. moves toward IFRS.

accounting for income taxes, accounting, taxes, earnings management, asset pricing

Abstract:
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the maximum statutory personal tax rate on dividends from 38.1 percent to 15 percent. This study analyzes dividend declarations in the quarters surrounding passage. We find dramatic increases in regular dividends and special dividends after enactment and a decline in share repurchases. We find some evidence that the firms changing their distribution patterns are owned disproportionately by insiders. This finding is consistent with manager-owners modifying the firm's dividend policy to reflect the new tax-advantaged status of dividend income for individual investors.

dividends, taxes, individual ownership

Abstract:
This paper examines the impact of capital gains taxes on equity pricing. Examining three-day cumulative abnormal returns for quarterly earning announcements from 1983-1997, we present evidence consistent with shareholders' capital gains taxes affecting stock price responses. To our knowledge, this is the first study to link shareholder taxes and share price responses to earnings releases. The results imply that shares trade at higher (lower) prices when individual investors face incremental taxes (tax savings) created by selling appreciated (depreciated) shares before they qualify for long-term treatment. Unlike prior studies that have focused on price reactions in settings where shareholder taxes are unusually salient (e.g., tax law changes, turn-of-the-year trading, or tax-sensitive transactions), this study finds the imprint of capital gains taxes in a more general setting.

Abstract:
This paper examines the impact of capital gains taxes on equity pricing. Examining three-day cumulative abnormal returns for quarterly earning announcements from 1983-1997, we present evidence consistent with shareholders' capital gains taxes affecting stock price responses. To our knowledge, this is the first study to link shareholder taxes and share price responses to earnings releases. The results imply that shares trade at higher (lower) prices when individual investors face incremental taxes (tax savings) created by selling appreciated (depreciated) shares before they qualify for long-term treatment. Unlike prior studies that have focused on price reactions in settings where shareholder taxes are unusually salient (e.g., tax law changes, turn-of-the-year trading, or tax-sensitive transactions), this study finds the imprint of capital gains taxes in a more general setting.

Capital gains taxes, stock price and volume reactions, quarterly earnings announcements

Abstract:
This paper contributes to our understanding of the determinants of price responses to inclusion in the S&P 500 by providing evidence consistent with capital gains tax planning impacting stock reactions. Tests are conducted on 426 additions from 1978-1999. We regress the returns on the first trading day following announcement on a capital gains tax measure and controls. The evidence is consistent with the share prices of appreciated firms being temporarily bid up to compensate individual shareholders for any unanticipated capital gains taxes triggered when they sell to index funds and the share prices of depreciated firms being temporarily diminished when individual shareholders sell because buyers and sellers share the tax savings associated with deductible capital losses. We infer from these findings that in rebalancing their portfolios after S&P 500 additions, index funds share individual shareholders' capital gains taxes (or tax savings) through sales price adjustments. Consistent with temporary price pressure, further analysis shows that much of the price reaction unwinds over the following week's trading. Finding that personal capital gains taxes affect stock returns in a setting that does not bias toward taxes mattering suggests that capital gains tax capitalization may be a pervasive feature in equity valuation.

Abstract:
Capital gains tax rates vary with the length of time that individuals hold property. This paper investigates whether these holding period incentives to defer (accelerate) the sale of appreciated (depreciated) property affect the prices of securities entering the Standard & Poor's 500 Stock Index. Examining additions from 1978-1999, we find that on the first trading day following announcement, abnormal stock returns are increasing in the difference between short-term and long-term capital gains tax treatment. We infer that stock price adjustments shift individual investors' tax burdens to acquiring index funds. Consistent with temporary price pressure, the price reaction largely unwinds subsequently.

Abstract:
This paper models the impact of the tax system and GAAP on the real and financial reporting decisions of corporations. It provides a first step toward joint evaluation of taxation and financial reporting in the standard economic analyses of corporate behavior. The key finding is that value arises from real decisions that provide firms with discretion in their tax and financial reporting. This desire for flexibility modifies the optimal decisions of firms, in theory, and we provide examples that illustrate this behavior in the real world.

Abstract:
This paper models the impact of the tax system and GAAP on the real and financial reporting decisions of corporations. It provides a first step toward joint evaluation of taxation and financial reporting in the standard economic analyses of corporate behavior. The key finding is that value arises from real decisions that provide firms with discretion in their tax and financial reporting. This desire for flexibility modifies the optimal decisions of firms, in theory, and we provide examples that illustrate this behavior in the real world.

taxation, financial reporting, accounting, discretion

Abstract:
In this paper, we investigate the effect of stock options on the tax position of the firm. We argue that option tax deductions can significantly affect a firm's marginal tax rate and that the effect is masked by current financial reporting rules. We present an approach for factoring in option deductions in assessing a firm's tax position and document that the effect can be substantial. In particular, many firms that appear to be profitable and face high income tax burdens (based on public financial statement data) actually pay relatively little in taxes. We provide evidence that the effect of options on taxes may help to explain managerial decisions such as why apparently profitable firms carry so little debt, lease rather than purchase, and out-source tax-advantaged activities, such as research and development, to syndicated partnerships.

Employee stock options, corporate tax rate, capital structure, debt ratio, cash flows

Abstract:
Faced with pressure from increased global competition and capital mobility, Germany's government made a surprise announcement in December 1999 that it would repeal the longstanding capital gains tax on sales of corporate crossholdings. The repeal was hailed as a revolutionary step toward breaking up Germany's complex web of cross-ownership. When the changes become effective in 2002, Germany will move from having one of the most punitive taxes on corporate capital gains to having the smallest among major industrial countries.

This paper uses Germany as a natural experiment to provide evidence on the extent to which taxes present a barrier to the efficient acquisition and divestiture of stakes in other firms. In particular, we examine the stock market response by German firms to the announcement that capital gains taxes on intercompany holdings would be eliminated. We find a positive association between a firm's abnormal stock returns and the extent of its crossholdings, consistent with taxes acting as a barrier to efficient allocation of ownership and investment. However, the reaction is limited to the largest banks and insurers and their extensive minority holdings in industrial firms, suggesting that taxes are not the binding constraint preventing most firms from divesting their crossholdings.

Capital gains taxes, stock price reactions, diversification discount, efficient ownership structure, open economy, financial institutions

Abstract:
This paper examines the impact on asset prices from a reduction in the long-term capital gains tax rate using an equilibrium approach that considers both demand and supply responses. We demonstrate that the equilibrium impact of capital gains taxes reflects both the capitalization effect (i.e., capital gains taxes decrease demand) and the lock-in effect (i.e., capital gains taxes decrease supply). Depending on time periods and stock characteristics, either effect may dominate. Using the Taxpayer Relief Act of 1997 as our event, we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock-in effect in the week after the rate reduction became effective. Nondividend paying stocks (whose shareholders only face capital gains taxes) experience higher average returns during the week the capitalization effect dominates and stocks with large embedded capital gains and high tax sensitive investor ownership exhibit lower average returns during the week the lock-in effect dominates. We also find that the tax cut increases the trading volume during the week immediately before and after the tax cut becomes effective and in stocks with large embedded capital gains and high tax sensitive ownership during the dominant lock-in week.

Abstract:
This paper examines the impact on asset prices from a reduction in the long-term capital gains tax rate using an equilibrium approach that considers both buyers' and sellers' responses. We demonstrate that the equilibrium impact of capital gains taxes reflects both the capitalization effect (i.e., capital gains taxes decrease demand) and the lock-in effect (i.e., capital gains taxes decrease supply). Depending on time periods and stock characteristics, either effect may dominate. Using the Taxpayer Relief Act of 1997 as our event, we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock-in effect in the week after the rate reduction became effective. Non-dividend paying stocks (whose shareholders only face capital gains taxes) experience higher average returns during the week the capitalization effect dominates and stocks with large embedded capital gains and high individual ownership exhibit lower average returns during the week the lock-in effect dominates. We also find that the tax cut increases the trading volume in non-dividend paying stocks during the dominant capitalization week and in stocks with large embedded capital gains and high individual ownership during the dominant lock-in week.

Asset pricing, capital gain taxes, capitalization, lock-in effect, Taxpayer Relief Act of 1997

Abstract:
This paper exploits an unusually powerful setting to explore a choice many individual investors face regularly the decision to sell today or postpone selling until lower rates are available in the future. We examine trading volume and stock returns around the 1998 reduction in the holding period required for individual investors to receive the most favorable long-term capital gains tax rate. For firms whose initial public shareholders were affected by the legislation, we find trading volume increasing and share returns decreasing in past price performance on the day the legislation was publicly disclosed. The results are consistent with capital gains holding periods distorting markets sufficiently that if investors are permitted to liquidate appreciated positions at favorable rates, enough will sell immediately to move prices. To our knowledge, this is the first study linking trading volume and security prices to a change in capital gains holding periods.

Abstract:
1998 legislation reduced the minimum holding period for individuals to receive the most favorable long-term capital gains tax rate from 18 months to 12 months. This paper empirically documents the extent to which the reduction affected firm-specific trading volume and share prices. To our knowledge, it is the first study linking equity trading to a change in capital gains holding periods. Evidence presented in this paper indicates that trading volume soared and share prices fell for firms whose initial public shareholders immediately benefited from the 1998 reduction. The findings are consistent with the following interpretation: At least some shareholders wanted to sell their appreciated stock but were deferring their sales until the applicable capital gains tax rate dropped from 28 percent to 20 percent. When favorable capital gains tax treatment was suddenly possible through repeal of the 18-month holding period, individuals sold shares that qualified for the lower rate under the immediately applicable 12-month holding period. On the disclosure date (June 24, 1998), sales were sufficient in companies that had recently completed the 12-month holding period that share prices tumbled. Prices rebounded the following day, indicative of temporary price pressure.

Capital Gains Taxes, Trading Volume, Equity Value, Stock Market Returns, Initial Public Offerings

Abstract:
Current U.S. law nets the total portfolio of realized capital gains and losses to compute capital gains taxes. Prior research, however, typically ignores the implication of this provision, i.e., the marginal tax rate for a specific gain or loss depends on the taxpayer's total portfolio of realized gains and losses. We find that these nettings introduce complexity into the relation between share values and capital gains taxes, creating an incentive to diversify. For firms with stock returns that are positively (negatively) correlated with those of the overall market, share values generally are decreasing (increasing) in the capital gains tax rate.

Abstract:
Current U.S. law nets the total portfolio of realized capital gains and losses to compute capital gains taxes. Prior research, however, typically ignores the implication of this provision, i.e., the marginal tax rate for a specific gain or loss depends on the taxpayer's total portfolio of realized gains and losses. We find that these nettings introduce complexity into the relation between share values and capital gains taxes, creating an incentive to diversify. For firms with stock returns that are positively (negatively) correlated with those of the overall market, share values generally are decreasing (increasing) in the capital gains tax rate.

capital gains taxes, diversification, stock returns

Abstract:
We hypothesize that, in their annual accounting reports, insurers allocate premiums and losses from multistate policies to reduce total state taxes. To test this prediction, we examine firm-level data, collected from the publicly-available statutory reports used to compute tax bases and filed with each state government. If insurers manage allocations to avoid taxes, we anticipate an inverse relation between the tax rate and the premium-to-loss ratio, which is the industry's standard measure of the price of a unit of coverage. Firm-specific prices are computed using premium and loss information from the annual regulatory reports filed with each state in which an insurer underwrites. Primary analysis is conducted on 12,573 insurer-state observations from 1993. We find the premium-to-loss ratio is decreasing in state tax rates, consistent with multistate insurers managing their annual accounting reports to shift premiums (losses) to more (less) favorably taxed states.

Abstract:
We hypothesize that, in their annual accounting reports, insurers allocate premiums and losses from multistate policies to reduce total state taxes. To test this prediction, we examine firm-level data, collected from the publicly-available statutory reports used to compute tax bases and filed with each state government. If insurers manage allocations to avoid taxes, we anticipate an inverse relation between the tax rate and the premium-to-loss ratio, which is the industry's standard measure of the price of a unit of coverage. Firm-specific prices are computed using premium and loss information from the annual regulatory reports filed with each state in which an insurer underwrites. Primary analysis is conducted on 12,573 insurer-state observations from 1993. We find the premium-to-loss ratio is decreasing in state tax rates, consistent with multistate insurers managing their annual accounting reports to shift premiums (losses) to more (less) favorably taxed states.

Abstract:
We hypothesize that, in their annual accounting reports, property-casualty insurers allocate premiums from multistate policies to reduce total state taxes. To test this production, we exploit the industry?s unique state tax disclosures. We examine firm-level data, collected from the publicly-available, statutory reports filed with each state government. Reported premiums at the insurer-state level, scaled by incurred losses, are regressed on state tax measures. Consistent with tax-motivated income shifting, we find the premium-loss ratio is decreasing in state tax rates. The negative relation is greatest for insurers specializing in multistate lines of business.

Abstract:
This paper presents evidence consistent with capital gains tax changes inversely affecting stock return volatility. We show that, since the government shares in the realized gains and losses of assets held by taxable investors, a capital gains tax rate cut reduces risk sharing between investors and the government. This reduction in risk sharing adversely affects investors' consumption smoothing, increasing consumption risk and leading to higher asset return risk and volatility. Examining volatility before and after the 1997 reduction in the capital gains tax rate, we document a dramatic increase in the return volatility of the market index and industry portfolios, even after controlling for all known determinants of volatility. Furthermore, as predicted, non- or lower dividend-paying stocks experience larger increases in return volatility than higher dividend-paying stocks and stocks with large embedded capital losses have larger increases in return volatility than stocks with small embedded capital losses. These empirical findings show that a capital gains tax rate cut affects a firm's return volatility differently depending on its capital gains tax sensitivity.

Capital Gains Taxes, Stock Return Volatility

Abstract:
This paper provides evidence consistent with shareholders' personal tax incentives affecting stock prices and trading volume. On June 24, 1998, the marginal tax rate on capital gains was reduced from 28 percent to 20 percent for individual investors holding shares between 12 and 18 months. This study compares firms whose initial public shareholders immediately benefited from the reduction to other IPO firms. The sample of immediately affected firms recorded mean, incremental, one-day stock price declines of -1.3 percent amid heavy trading. The results are consistent with capital gains tax planning constraining investment portfolio management. When the constraint was lifted, enough shareholders sold that prices moved. The results imply that despite increasingly liquid capital markets, transaction costs remain large enough to prevent investors from entering the market immediately and fully offsetting downward price pressure from individual capital gains tax management.

capital gains taxes, initial public offerings, trading volume, price pressure

Abstract:
This paper provides evidence consistent with shareholders' personal tax incentives affecting stock prices and trading volume. On June 24, 1998, the marginal tax rate on capital gains was reduced from 28 percent to 20 percent for individual investors holding shares between 12 and 18 months. This study compares firms whose initial public shareholders immediately benefited from the reduction to other IPO firms. The sample of immediately affected firms recorded mean, incremental, one-day stock price declines of -1.3 percent amid heavy trading. The results are consistent with capital gains tax planning constraining investment portfolio management. When the constraint was lifted, enough shareholders sold that prices moved. The results imply that despite increasingly liquid capital markets, transaction costs remain large enough to prevent investors from entering the market immediately and fully offsetting downward price pressure from individual capital gains tax management.

Capital gains taxes, initial public offerings, trading volume, price pressure

Abstract:
This paper assesses whether insurers' state taxes reduce purchases of property-casualty coverage. Tests are conducted using state aggregates of insurer-level data from publicly-available, annual accounting reports for 1993, 1994, and 1995. A positive relation between self-insurance and state taxes is detected, consistent with consumers opting to self-insure rather than bear the incidence of higher insurer taxes. As expected, tax effects vary with the elasticity of demand. When demand is largely inelastic, e.g., automobile liability coverage, taxes do not affet self-insurance.

Abstract:
The U.S. corporate tax revenue implications for foreign-domiciled firms acquiring U.S. companies is an important and longstanding tax policy issue. This study attempts to provide some empirical underpinning for this controversial debate. We compare actual corporate taxable income before and after their 1996 acquisitions for 31 matched pairs, half acquired by foreign-controlled companies and half acquired by American-controlled firms. Contrary to claims that foreign-controlled firms pay less tax, we find no evidence that taxable income declines more after a non-U.S. shareholder acquires a U.S.-domiciled firm than after a U.S. shareholder acquires a U.S.-domiciled firm.

Abstract:
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces the maximum statutory personal tax rate on dividends from 38.1 percent to 15 percent. This study analyzes dividend declarations in the quarter following passage. Aggregate dividends rose by 9 percent when boards of directors first met following enactment. Consistent with the dividend changes being tax-motivated, they are increasing in the percentage of the firm held by individuals. Dividend changes also increased with insider ownership, consistent with managers acting in their own interests. However, these results are limited primarily to firms that made large, special dividends. We find little evidence of an increase in regular, quarterly dividend payments.

Abstract:
This paper examines changes in the role that auditors play in corporate tax planning following recentevents, including the well-known accounting scandals, passage of the Sarbanes-Oxley Act, andregulatory actions by the SEC and PCAOB. On the whole, these events have increased thesensitivity to and scrutiny of auditor independence. We examine the effects of these events on themarket for tax planning, in particular the longstanding link between audit and tax services. Whilethe effects are recent, they are already being seen in the data. Specifically, there has already beena dramatic shift in the market for tax planning away from obtaining tax planning services from one'sauditor. We estimate that the ratio of tax fees to audit fees paid to the auditors of firms in the S&P500 decline from approximately one in 2001 to one-fourth in 2004. At the same time, we find noevidence of a general decline in spending for tax services. In sum, the evidence indicates adecoupling of the longstanding link between audit and tax services, such that firms are shifting theirpurchase of tax services away from their auditor and towards other providers.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This paper tests whether firms altered their dividend and share repurchase policies in response to the 2003 reductions in shareholder tax rates. We predict that firms substituted dividends for repurchases, because the reduction in dividend tax rates exceeded the reduction in the capital gains tax rates. As expected, we find substitution and find that it is increasing in the percentage of the company owned by individual investors, the only shareholders affected by the legislation. These findings are consistent with boards of directors considering the tax preferences of individual stockholders (particularly officers and managers) when setting dividend and share repurchase policies.

Abstract:
We empirically document that stock prices moved inversely with dividend yields during the May, 1997 week, when the White House and Congress agreed on a budget accord that included a reduction in the capital gains tax rate. The share prices of firms not currently paying dividends increased approximately 6 percentage points more over a five-day window than the share prices of other firms. Among firms paying dividends, the change in share prices was decreasing in dividend yields. The results are consistent with at least two related explanations. First, to the extent a stock's returns are expected to be taxed as capital gains, a reduction in the expected capital gains tax rate enhances the attractiveness of the investment to investors. Second, to the extent a firm's stock is held by shareholders subject to the capital gains tax, a reduction in the expected capital gains tax rate increases its market value. The findings present evidence consistent with neither a sell-off of appreciated securities following the rate reduction nor a reduction in the compensation for capital gains taxes that selling shareholders demand from buyers. The upward price pressure around the accord dominated any downward price pressure imposed by these factors.

Abstract:
This paper defines an intertemporal tax discontinuity (ITD) as a circumstance in which different tax rates are applied to gains and losses realized at one point in time versus some other point in time, and studies the effects of ITDs on market behaviors at the time of disclosures of firm performance. The results show that ITDs either depress or amplify trading volume at the time of disclosure, depending upon whether the disclosure is 'good news' or 'bad news,' repectively, and lead to 'overreactions' in price changes independent of the 'news.' We propose empirical tests of one intertemporal tax discontinuity, the spread between short-term capital gains tax rates and long-term capital gains tax rates. We predict that stock responses to disclosures, such as quarterly earnings announcements, increase in the difference between short- term and long-term capital gains tax rates.

Abstract:
This paper assesses whether insurers' state taxes reduce purchases of property-casualty coverage. Tests are conducted using state aggregates of insurer-level data from publicly-available, annual accounting reports for 1993, 1994, and 1995. A positive relation between self-insurance and state taxes is detected, consistent with consumers opting to self-insure rather than bear the incidence of higher insurer taxes. The primary empirical estimates imply that a 1 percent increase in the state premium tax rate reduces non-automobile insured losses by 0.18 percent to 0.28 percent. These elasticities suggest that for the mean state, a standard deviation increase in the state tax rate (0.5 percent) would lower insured losses by approximately $140 million or 7.5 percent of current coverage. As expected, tax effects vary with the elasticity of demand. When demand is largely inelastic, e.g., automobile liability coverage, taxes do not affect self-insurance.

Abstract:
To our knowledge, this paper provides the most comprehensive analysis of firm-level corporate income tax expenses to date. We use publicly available financial statement information to estimate firm-level effective tax rates (ETRs) for 10,642 corporations from 85 countries from 1988 to 2007. We find that multinationals and domestic-only companies face similar ETRs. We also find that, on average, ETRs declined by seven percentage points or 20% over the period. German, Japanese, Australian and Canadian decreases were large. American, British, and French declines were more modest. Nonetheless, because ETRs were falling worldwide, the ordinal rank from high-tax countries to low-tax countries changed little. Japanese firms always faced the highest ETRs. ETRs for tax havens and countries from the Middle East and Asia (ignoring Japan) were always lower than those for the U.S. and European countries. These findings should provide some empirical underpinning for ongoing policy debates about the taxation of multinational profits.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and S&P 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, including the effect of options reduces the estimated median marginal tax rate from 31% to 5%. For S&P firms, in contrast, option deductions do not affect marginal tax rates to a large degree. Our evidence suggests that option deductions are important nondebt tax shields and that option deductions substitute for interest deductions in corporate capital structure decisions, explaining in part why some firms use so little debt.

Capital structure, corporate taxes, debt policy, employee stock options, option deductions

Abstract:
This study investigates the importance of multinational tax planning for global enterprises by examining cross-border payments of dividends, interest, royalties and compensation between commonly-owned foreign affiliates of U.S. multinationals. Using data from the multinationals' actual U.S. tax returns, we find dividends, royalties and sometimes interest are negatively correlated with the cumulative income and withholding taxes levied on cross-border transfers. We find no evidence that compensation payments are correlated with taxes. The findings are consistent with human capital contracts encountering more adverse non-tax considerations than equity, debt, and intangible property contracts.

Abstract:
This paper analyzes the effects of risk-based capital (RBC) on life insurers' investment portfolio management. We test for RBC-induced portfolio adjustments by comparing the 1993 change in investment portfolio balances for 1,495 stock life insurers, dichotomized by RBC capitalization, with the annual changes in their balances for the preceding four years (a difference-in-differences approach). Despite widespread expectations of major restructuring in the investments of life insurers, our exhaustive set of tests generally fails to detect a response to the asset risk component of RBC standards. At most, there is weak evidence that the life insurance companies subject to the greatest regulatory oversight and reputational damage under RBC, reduced their holdings in mortgages, preferred stock, and low quality bonds.

Abstract:
This study investigates the effects of state taxes and regulation on an organizational structure decision for expanding property-casualty insurers (subsidiary versus license). Tests are conducted of the relation between the organizational structure of 2335 property-casualty insurers and state tax and regulatory conditions in 1991. Evidence is provided that property-casualty insurers structure their cross-state expansion to mitigate both state tax and regulatory costs.

Abstract:
This paper examines American state and Canadian provincial data to estimate the extent to which manufacturers minimize subnational tax payments by managing four key components of subnational tax returns: taxable income, sales, compensation, and assets. To our knowledge, this is the first study to estimate elasticities of these financial data to cross-subnational variation in corporate income taxes. The findings are consistent with subnational, tax-motivated income shifting and management of the sales apportionment factor, but not the compensation or assets factors. We estimate state (provincial) taxable income falls 5.6 (6.9) percent for every one percentage point increase in the jurisdiction's maximum statutory corporate income tax rate.