The Extent of Implicit Taxes at the Corporate Level and the Effect of TRA86

58 Pages Posted: 19 Dec 2008 Last revised: 23 Jun 2011

See all articles by Ross Jennings

Ross Jennings

University of Texas at Austin - Department of Accounting

Connie D. Weaver

Texas A&M University - Department of Accounting

William J. Mayew

Duke University - Fuqua School of Business

Date Written: June 3, 2009

Abstract

We examine the extent of implicit taxes at the corporate level and the effect on implicit taxes of the Tax Reform Act of 1986 (TRA86). Using a variety of specifications, we find consistent evidence that implicit taxes eliminate virtually all of the cross-sectional differences in explicit tax preferences prior to TRA86, and then abruptly decline and eliminate only about one-third of the cross-sectional differences in tax preferences in years following TRA86. We triangulate this evidence that implicit taxes declined following TRA86 by also providing evidence (a) of a decline in the relation between changes in tax preferences and changes in pre-tax returns, (b) of an increase in the persistence of tax-related earnings changes, (c) that these dramatic economic changes are priced by investors. Finally, we provide evidence suggesting that the decline in implicit taxes after TRA86 is driven at least in part by expansion of aggressive tax planning and use of tax shelters. Taken together these results indicate that TRA86 had a profound and lasting effect on implicit taxes at the corporate level.

Keywords: Implicit taxes, corporate tax preferences, cost advantage

JEL Classification: M41, H25

Suggested Citation

Jennings, Ross and Weaver, Connie D. and Mayew, William J., The Extent of Implicit Taxes at the Corporate Level and the Effect of TRA86 (June 3, 2009). McCombs Research Paper Series No. ACC-05-09, Available at SSRN: https://ssrn.com/abstract=1317478 or http://dx.doi.org/10.2139/ssrn.1317478

Ross Jennings (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-5340 (Phone)
512-471-3904 (Fax)

Connie D. Weaver

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

William J. Mayew

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7781 (Phone)
919-660-7971 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/mayew.htm

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
222
Abstract Views
1,493
rank
153,884
PlumX Metrics