An Empirical Investigation of Factors Influencing Corporate Tax-Motivated Income Shifting
Posted: 15 Sep 1995
There is a growing literature attempting to understand how firms react to tax incentives. A few papers examine how firms plan for anticipated statutory income tax rate reductions. Collectively this research investigates what types of income firms shift across time to reduce their tax payments. However prior research investigating which firms shift income across time has generated incomplete and inconsistent findings. This dissertation identifies which types of firms are more likely to engage in tax-motivated shifting. It addresses the inconsistent findings of prior research and it examines the extent to which firms that shift income consider the costs their shifting imposes on their customers. The Tax Reform Act of 1986 reduced corporate tax rates over two tax years. Firms should have deferred income during the rate reduction phase-in period only if the tax benefits of deferral exceeded the cost of reducing financial accounting income plus the costs the shifting firm imposed on its customers. The hypotheses tested include: (1) firms facing greater tax rate reductions defer more income than firms facing smaller tax rate reductions; (2) larger firms defer relatively more income than smaller firms because the latter are less sophisticated tax planners; (3) sellers of nondurable goods defer more gross profit than sellers of durable goods because the latter impose higher tax costs on their customers; and (4) firms with higher market power shift more gross profit than firms with lower market power because the former can force their customers to absorb some of the costs of shifting income. There is no evidence that firms facing larger tax rate decreases defer more income than firms facing lower tax rate decreases. In addition this research shows that larger firms defer relatively less income than smaller firms. Also this study finds evidence that sellers of nondurable goods defer more gross profit than sellers of durable goods. This result is consistent with shifting firms considering the tax position of their customers when deciding whether to engage in tax-motivated income shifting. Finally there is some evidence that firms with relatively higher market power shift more income than firms with less market power.
JEL Classification: H25
Suggested Citation: Suggested Citation