How Do Corporate Tax Rates Alter Conforming Tax Avoidance?

Accepted at the European Accounting Review

46 Pages Posted: 15 Feb 2020 Last revised: 12 Nov 2023

See all articles by Sebastian Eichfelder

Sebastian Eichfelder

Otto-von-Guericke-Universität Magdeburg

Martin Jacob

University of Navarra, IESE Business School

Nadine Kalbitz

affiliation not provided to SSRN

Kelly Wentland

George Mason University - Department of Accounting

Date Written: November 10, 2023

Abstract

We examine an international panel of domestic firms to quantify the degree to which conforming tax avoidance changes with statutory tax rates. We derive an estimation method that identifies conforming tax avoidance as a response to variation in tax rates over time and across countries. The estimation method distinguishes this type of response from other responses, such as real effects with changing tax rates. Overall, we find that a 1-percentage point decrease in the corporate tax rate corresponds with a 1.1 percent increase in pre-tax book income in domestic firms, which we interpret as a substantial conforming tax avoidance response by these firms. We further show that these findings are not explained by broader (non-tax) incentives for earnings management, particular countries, losses, intangibles, or short-run intertemporal profit shifting. We identify discretionary cash flows, reserves, and the valuation of inventories as channels for conforming tax avoidance and provide preliminary evidence that this type of activity also plays a role in multinational firms. Overall, our findings imply that there are tax revenue implications of a tax rate cut due to reduced conforming tax avoidance and that conforming tax avoidance might impair the information content of financial statements.

Accepted at the European Accounting Review.

Keywords: conforming tax avoidance, tax avoidance, international tax, book-tax conformity

JEL Classification: H25, H26

Suggested Citation

Eichfelder, Sebastian and Jacob, Martin and Kalbitz, Nadine and Wentland, Kelly, How Do Corporate Tax Rates Alter Conforming Tax Avoidance? (November 10, 2023). Accepted at the European Accounting Review, Available at SSRN: https://ssrn.com/abstract=3523388 or http://dx.doi.org/10.2139/ssrn.3523388

Sebastian Eichfelder (Contact Author)

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany
0391-67-18811 (Phone)

Martin Jacob

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Nadine Kalbitz

affiliation not provided to SSRN

Kelly Wentland

George Mason University - Department of Accounting ( email )

Fairfax, VA
United States

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