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

50 Pages Posted: 26 Nov 2018 Last revised: 1 Jul 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

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2021

Abstract

Many studies use GAAP effective tax rates (ETRs) as a proxy for tax avoidance and assume that very low (high) ETRs represent the greatest (least) tax avoidance. Using income tax footnote disclosures from 2008 through 2016, we investigate how well ETRs capture cross-sectional differences in tax avoidance versus other factors. We document that ETRs below 5% and above 40% are significantly influenced by items largely unrelated to tax avoidance such as valuation allowances and goodwill impairments. Truncating ETRs at zero and one, controlling for standard determinants of tax avoidance, and using industry-size-adjusted ETRs or multi-year GAAP ETRs do not eliminate the clustering of factors largely unrelated to tax avoidance in the tails of the distribution. Cash ETRs attenuate but do not eliminate this clustering. Researchers can use ETR rate reconciliation data to construct an adjusted ETR that removes the influence of factors largely unrelated to tax avoidance. Our findings inform researchers about factors largely unrelated to tax avoidance that drive significant deviations in ETRs from the statutory tax rate. This 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 rate, valuation allowance, goodwill impairments, FIN 48

Suggested Citation

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

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