Spillovers from Regulatory Fragmentation: Evidence from Corporate Tax Burdens

Abstract

Increased corporation regulation in recent decades has raised the likelihood of regulatory oversight spillovers-the extent to which one agency's interactions with a regulated firm affects firm behaviors under the purview of another agency. We study how such spillovers can affect the mission of a specific regulator-the tax authority-using a measure of firm-specific exposure to fragmented regulation. Using a sample of publicly-traded U.S. firms, we document that regulatory fragmentation is associated with higher effective tax rates, indicating that non-IRS oversight constrains tax planning, which is the purview of the tax authority. This relation is increasing in the overall amount of regulation the firm faces and in the relative absence of alternative (e.g., capital market) monitors. Additionally, we observe that regulatory fragmentation is associated with lower IRS scrutiny and less variation in tax burdens within industries, suggesting that fragmented oversight impacts IRS monitoring efforts as well as industry competitive dynamics.

Keywords: corporate taxes, tax planning, regulatory spillover, regulation, IRS

JEL Classification: H25, H26, L21, L51, M4, P43