Examining Tax Strategy Choice
Neuman, Stevanie S. 2021. Examining Tax Strategy Choice. Journal of the American Taxation Association. Available at: https://doi.org/10.2308/JATA-19-035
Posted: 21 Feb 2016 Last revised: 1 Oct 2021
Date Written: August 11, 2021
Abstract
Most recent tax research examines the level of firms’ effective tax rates (ETRs), focusing on tax avoidance. However, theoretical work and research on book-tax tradeoffs and reputational costs indicate some firms have other tax planning goals. Moreover, anecdotal evidence suggests consistent tax outcomes are important; thus, the volatility of ETRs may be an alternative aspect of firms’ tax planning. In this study, I find some firms utilize a second, distinct approach to tax strategy – maintaining low ETR volatility – by documenting systematic differences in firm characteristics associated with each tax strategy approach and a predictable shift in characteristics when firms change tax strategies. In combination, these results identify at least two distinct approaches to tax strategy. I also find firms exhibiting low ETR volatility earn significantly higher median buy-and-hold returns than firms exhibiting low ETR levels, consistent with benefits to alternative tax strategies.
Keywords: Tax Planning Strategies, Tax Volatility, Tax Minimization, Firm Value
JEL Classification: M40, M41, M49
Suggested Citation: Suggested Citation