Extreme ETRs: When Effective Tax Rates Capture Something Other than Tax Avoidance

53 Pages Posted: 26 Nov 2018 Last revised: 9 Jun 2019

See all articles by Casey M. Schwab

Casey M. Schwab

Indiana University - Kelley School of Business - Department of Accounting

Bridget Stomberg

Indiana University - Kelley School of Business

Junwei Xia

Indiana University - Kelley School of Business

Date Written: May 2019

Abstract

Many studies use the GAAP effective tax rate (ETR) as a proxy for tax avoidance. A maintained assumption of these studies is that GAAP ETRs are decreasing in corporate tax avoidance with very low ETRs indicating too much tax avoidance and very high ETRs indicating too little tax avoidance. Researchers are increasingly interested in the tails of the ETR distribution and the negative consequences of too little or too much tax avoidance. Our contribution is providing large-sample empirical evidence of what drives GAAP ETRs throughout the distribution – particularly in the tails. Using a sample of roughly 7,000 income tax footnote disclosures from 2008 through 2016, we document that factors largely unrelated to tax avoidance explain most of the deviation in GAAP ETRs from the statutory tax rate for observations in the top and bottom decile of the GAAP ETR distribution. For example, factors associated with firm performance represent 48 percent of the deviation in the lowest decile and 22 percent in the highest decile. Our findings inform researchers about factors unrelated to tax avoidance that drive significant deviations in GAAP ETR from the statutory tax rate.

Keywords: corporate tax, tax avoidance, accounting for income taxes, effective tax rate

JEL Classification: H25, H26, M41, M48

Suggested Citation

Schwab, Casey M. and Stomberg, Bridget and Xia, Junwei, Extreme ETRs: When Effective Tax Rates Capture Something Other than Tax Avoidance (May 2019). Kelley School of Business Research Paper No. 18-92. Available at SSRN: https://ssrn.com/abstract=3281289 or http://dx.doi.org/10.2139/ssrn.3281289

Casey M. Schwab

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Junwei Xia (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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