The Sources of Declining Effective Tax Rates: Insight From Effective Tax Rate Reconciliations

61 Pages Posted: 28 May 2017 Last revised: 10 Sep 2018

See all articles by Katharine D. Drake

Katharine D. Drake

University of Arizona - Department of Accounting

Russ Hamilton

Southern Methodist University (SMU)

Stephen J. Lusch

Texas Christian University - Department of Accounting

Date Written: September 4, 2018

Abstract

Using firms’ tax rate reconciliations, we examine the sources of declining effective tax rates (ETRs) among profitable firm-year observations. We find the downward trend in domestic firms’ ETRs is largely attributable to the effects of decreases to the valuation allowance (VA) account. Our results indicate that failure to consider a firm’s loss history biases GAAP ETRs downward, since most VA decreases occur in profitable years but increases in VA occur in loss years, which are generally excluded from tax studies. To address this bias, we introduce a methodology for estimating the probability of VA release. Additionally, we find that the decline in multinational firms’ GAAP ETRs arises from declining foreign tax rates and decreasing amounts of income subject to state taxes. Our study provides new insight into the relative burdens of taxation across groups of firms, and how those burdens have changed over time.

Keywords: Effective tax rates, Book-tax differences, Multinational firms

Suggested Citation

Drake, Katharine D. and Hamilton, Russ and Lusch, Stephen J., The Sources of Declining Effective Tax Rates: Insight From Effective Tax Rate Reconciliations (September 4, 2018). Available at SSRN: https://ssrn.com/abstract=2974219 or http://dx.doi.org/10.2139/ssrn.2974219

Katharine D. Drake (Contact Author)

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Russ Hamilton

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Stephen J. Lusch

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

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