Tax Management, Sustainable Competitive Advantage, and the Effects of Tax Reform

33 Pages Posted: 31 Oct 2002

See all articles by James R. Boatsman

James R. Boatsman

Arizona State University (ASU) - School of Accountancy

Sanjay Gupta

Michigan State University - Eli Broad College of Business

Connie D. Weaver

Texas A&M University - Department of Accounting

Date Written: August 2002

Abstract

This study examines whether firms' advantage from lower explicit taxes (tax management) is mitigated by lower pre-tax incomes (implicit taxes) and whether this advantage creates sustainable competitive advantage. We investigate a sample of firms with low explicit tax rates prior to the enactment of the Tax Reform Act of 1986 (the Act) and a control sample of firms with higher explicit taxes, over a 14-year period bracketing the Act. In years prior to the Act, we find that lower explicit taxes were offset by correspondingly lower pre-tax incomes such that after-tax incomes were equal. Cumulative market returns from portfolio investments in each sample's equity securities were also equal suggesting that no competitive advantage existed during this period. In the years immediately after the Act, the differences in explicit taxes narrowed but differences in pre-tax incomes diminished less, such that after-tax incomes of the low tax rate firms suffered. Market returns were similarly lower. In the final years, the after-tax incomes and market returns returned to equality. These results suggest that aggressive tax management, like many other behaviors, tends not to yield a sustainable competitive advantage. Rather, frictions in "unwinding" implicit taxes seemingly result in a short-term competitive disadvantage following tax reform aimed at leveling the explicit tax playing field.

Keywords: implicit taxes, competitive advantage, tax reform

JEL Classification: H23, H25, M41

Suggested Citation

Boatsman, James R. and Gupta, Sanjay and Weaver, Connie D., Tax Management, Sustainable Competitive Advantage, and the Effects of Tax Reform (August 2002). Available at SSRN: https://ssrn.com/abstract=323141 or http://dx.doi.org/10.2139/ssrn.323141

James R. Boatsman

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Sanjay Gupta (Contact Author)

Michigan State University - Eli Broad College of Business ( email )

632 Bogue Street, 520 BCC
East Lansing, MI 48824
United States
517-432-6488 (Phone)

HOME PAGE: http://www.broad.msu.edu/

Connie D. Weaver

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

430 Wehner
College Station, TX 77843-4353
United States

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