Taxes, Competition, and Organizational Form
59 Pages Posted: 30 Jan 2015 Last revised: 11 Nov 2016
Michael P. Donohoe
University of Illinois at Urbana-Champaign - Department of Accountancy
Petro Lisowsky
Boston University Questrom School of Business; Norwegian Center for Taxation
Michael Mayberry
University of Florida - Fisher School of Accounting
Date Written: November 10, 2016
Abstract
This study examines whether competition from tax-advantaged firms influences the organizational form choice of rival tax-disadvantaged firms, and explores two outcomes of this choice. Using a sample of 5,268 predominantly private U.S. commercial banks during 1997-2010, we find that greater competition from S corporation banks, which are subject to one layer of income tax, increases the likelihood that rival C corporation banks, which are subject to two layers of income tax, convert to S status. We estimate that the aggregate first-year tax savings from S conversion exceed $267 million, which converting banks can use to maintain competitive parity with their rivals. In terms of outcomes, converting banks increase their deposit market share more than non-converting banks, with advertising growth and new bank branches facilitating this increase. Non-converting banks increase their tax avoidance. Our findings provide economic insight into how competition shapes — and is shaped by — taxes and organizational form.
Keywords: Competition, Taxes, Organizational Form, S Corporation
JEL Classification: G21, H25, M40
Suggested Citation: Suggested Citation
Michael P. Donohoe (Contact Author)
University of Illinois at Urbana-Champaign - Department of Accountancy ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
Petro Lisowsky
Boston University Questrom School of Business ( email )
595 Commonwealth Avenue
Ste. 518H
Boston, MA 02215
United States
6173532661 (Phone)
Norwegian Center for Taxation ( email )
Helleveien 30
Bergen, Bergen 5045
Norway
Michael Mayberry
University of Florida - Fisher School of Accounting ( email )
Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
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