What determines ETRs? The relative influence of tax and other factors

56 Pages Posted: 26 Nov 2018 Last revised: 4 Feb 2021

See all articles by Casey M. Schwab

Casey M. Schwab

University of North Texas

Bridget Stomberg

Indiana University - Kelley School of Business

Junwei Xia

Texas A&M University - Department of Accounting; Indiana University - Kelley School of Business

Date Written: February 1, 2021

Abstract

Many studies use GAAP effective tax rates (ETR) as proxies for tax avoidance and rely on the maintained assumption that very low (high) ETRs represent the greatest (least) tax avoidance. We provide large-sample empirical evidence on how well ETRs capture cross-sectional differences in tax avoidance versus other factors. Using income tax footnote disclosures from 2008 through 2016, we document that items most related to firm performance explain a large portion of the deviation from the statutory tax rate for ETRs below 5% and above 40%. Cash ETRs and multi-year GAAP ETRs suffer similar limitations. Our findings inform researchers about factors not primarily related to tax avoidance that drive significant deviations in ETRs from the statutory tax rate. Understanding the drivers of ETRs is of increasing importance as the number of studies examining the consequences of very high and very low ETRs grows.

Keywords: tax avoidance, effective tax rates, firm performance

JEL Classification: H25, H26, M41, M48

Suggested Citation

Schwab, Casey M. and Stomberg, Bridget and Xia, Junwei, What determines ETRs? The relative influence of tax and other factors (February 1, 2021). 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

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
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)

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

430 Wehner
College Station, TX 77843-4353
United States

Indiana University - Kelley School of Business ( email )

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

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