Quantifying the Costs of Intertemporal Taxable Income Shifting: Theory and Evidence from the Property-Casualty Insurance Industry

Posted: 15 May 2004 Last revised: 13 May 2014

See all articles by David W. Randolph

David W. Randolph

Xavier University

Gerald L. Salamon

Indiana University - Kelley School of Business - Department of Accounting

Jim A. Seida

University of Notre Dame - Department of Accountancy

Date Written: February 18, 2004

Abstract

This paper presents a model of optimal tax-motivated intertemporal income shifting given a quadratic cost function that relates the costs associated with shifting income to the amount of income shifted. By formally modeling the income shifting decision, we: (1) show how parameter estimates of the income-shifting cost function can be extracted from a linear regression where a proxy for income shifted is the dependent variable, (2) provide insight about prior tax-motivated income shifting research, and (3) clarify the interpretation of independent variables that capture the interaction between tax incentives and non-tax costs. We then provide an empirical application of our method for quantifying the costs to shift federal taxable income by investigating the income shifting behavior of firms in the property and casualty (P&C) insurance industry following the Tax Reform Act of 1986. Our results suggest that the parameters of the cost function are negatively related to firm size, the cost to shift a significant amount of income are nontrivial, and the marginal cost to shift income increase as more income is shifted.

Keywords: Intertemporal income shifting, tax-motivated income shifting, non-tax costs, efficient tax planning

JEL Classification: D23, G22, H25

Suggested Citation

Randolph, David W. and Salamon, Gerald L. and Seida, Jim A., Quantifying the Costs of Intertemporal Taxable Income Shifting: Theory and Evidence from the Property-Casualty Insurance Industry (February 18, 2004). Available at SSRN: https://ssrn.com/abstract=546297 or http://dx.doi.org/10.2139/ssrn.546297

David W. Randolph

Xavier University ( email )

3800 Victory Parkway
ML 1211
Cincinnati, OH 45207
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5137451088 (Phone)

Gerald L. Salamon

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

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2868 (Phone)
812-855-8679 (Fax)

Jim A. Seida (Contact Author)

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-9496 (Phone)
574-631-5255 (Fax)

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