Expected Economic Growth and Corporate Tax Planning

41 Pages Posted: 7 Mar 2018

See all articles by Jaewoo Kim

Jaewoo Kim

University of Oregon - Department of Accounting

Sean T. McGuire

Texas A&M University - Department of Accounting

Steven Savoy

University of Illinois at Chicago - Department of Accounting

Ryan J. Wilson

University of Oregon

Date Written: February 28, 2018

Abstract

This study investigates whether expected economic growth is associated with corporate tax planning. We predict that higher expected economic growth increases the net present value of tax planning opportunities and thus increases investment in tax planning. Consistent with our prediction, we find that one-year ahead cash ETRs are negatively associated with GDP growth forecasts. A series of cross-sectional analyses show this association is more pronounced for firms that are highly cyclical, financially constrained, and more likely to experience a shift in their tax clientele. In supplemental analysis, we find that expected economic growth only influences firms' investment strategies that directly reduce tax expense on the financial statements while current macro-level financial constraints influence firms' investment in strategies that defer cash taxes paid. Our study highlights that growth expectations at the macroeconomic level are an important determinant of time series variation in corporate tax planning.

Keywords: Tax planning, Tax Avoidance, GDP Forecast, Economic Growth

JEL Classification: H26, H10, E30

Suggested Citation

Kim, Jaewoo and McGuire, Sean T. and Savoy, Steven and Wilson, Ryan J., Expected Economic Growth and Corporate Tax Planning (February 28, 2018). Mays Business School Research Paper No. 3132077. Available at SSRN: https://ssrn.com/abstract=3132077 or http://dx.doi.org/10.2139/ssrn.3132077

Jaewoo Kim

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Sean T. McGuire

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

430 Wehner
College Station, TX 77843-4353
United States

Steven Savoy

University of Illinois at Chicago - Department of Accounting ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States

Ryan J. Wilson (Contact Author)

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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