An Examination of Firms' Responses to Tax Forgiveness

Posted: 11 Nov 2015 Last revised: 2 Mar 2018

See all articles by Terry J. Shevlin

Terry J. Shevlin

University of California-Irvine

Jacob R. Thornock

Brigham Young University

Braden Williams

University of Texas at Austin - Department of Accounting

Date Written: August 15, 2015

Abstract

This study uses state tax amnesties to examine how firms respond to forgiveness — particularly repeated forgiveness — by a taxing authority. We posit that tax forgiveness programs alter taxpayer perceptions of the probability of detection by enforcers or the probability of future forgiveness programs, either of which could affect future tax avoidance. We find that firms headquartered in an amnesty-granting state increase income tax avoidance following the first instance of tax amnesty, relative to control firms in other states. Moreover, we find evidence that tax avoidance relatively increases with each additional repetition of a tax amnesty. Finally, we find that the effect of amnesties on tax avoidance is more prominent for small firms. Our findings suggest that repeated programs of tax forgiveness have increasingly negative implications for corporate tax collections.

Keywords: tax amnesty, tax enforcement

JEL Classification: H25, H26

Suggested Citation

Shevlin, Terry J. and Thornock, Jacob and Williams, Braden, An Examination of Firms' Responses to Tax Forgiveness (August 15, 2015). Review of Accounting Studies, Vol. 22, No. 2, 2017, Available at SSRN: https://ssrn.com/abstract=2688729 or http://dx.doi.org/10.2139/ssrn.2688729

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Jacob Thornock (Contact Author)

Brigham Young University ( email )

Provo, UT 84602
United States
8014220828 (Phone)

Braden Williams

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

Austin, TX 78712
United States

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