Abstract

Prior research concludes that tax-expert auditors facilitate tax aggressiveness. However, these studies examine auditors who also provide non-audit tax services to their clients, creating conflicting incentives. We predict that tax-expert auditors, who do not provide non-audit tax services, reduce tax aggressiveness, because tax aggressiveness imposes costs on them. We test our prediction using Chinese data, allowing us to identify Certified Tax Agents as tax-expert auditors. We find that companies are less tax aggressive when their signatory auditor is a tax-expert who does not provide non-audit tax services. Consistent with a causal relation, a decrease in tax rates, which reduces clients’ incentives to be tax aggressive, weakens the effect of tax-expertise on tax aggressiveness. Moreover, tax-expert auditors attenuate the type of tax aggressiveness that results in tax-related misstatements. Overall, by examining auditors who do not provide non-audit tax services, we find that tax-expert auditors curb tax aggressiveness, contrary to prior research.

Introduction

Prior research finds that some potential monitors of tax aggressiveness, including tax-expert auditors, facilitate aggressive tax avoidance ( Bianchi et al., 2019 ; McGuire et al., 2012 ). These studies, however, examine auditors who also provide non-audit tax services to their clients. Performing both audit and non-audit tax services creates conflicting incentives for auditors, making it difficult to interpret their results. As providers of assurance services, auditors have incentives to reduce clients’ tax aggressiveness, because tax aggressiveness increases the risk of adverse outcomes that impose costs on auditors. As providers of non-audit tax services, auditors have incentives to act as advocates for clients’ aggressive tax positions. The purpose of this study is to examine whether signatory auditors with tax expertise, who only perform audit services, curb tax aggressiveness.

Signatory auditors have incentives to curb tax aggressiveness because it is associated with adverse outcomes, including earnings management, fraud, scrutiny from regulators, poor earnings quality, audits by tax authorities, financial reporting opacity and misstatements, and higher crash risk. 1 These adverse outcomes can impose costs on signatory auditors through regulatory scrutiny, sanctions, litigation, reputational harm, reduced compensation, loss of clients, and impaired career advancement. 2 Consistent with tax aggressiveness imposing costs on auditors, prior studies find that tax aggressiveness is associated with a higher incidence of auditor resignations ( Goh et al., 2013 ) and higher audit fees ( Donohoe and Knechel, 2014 ).

While signatory auditors have incentives to curb tax aggressiveness, their ability to detect and prevent client tax aggressiveness is likely to vary. Auditors with tax expertise should have a greater ability to identify aggressive tax strategies that are likely to result in adverse outcomes, and thus are likely to be more effective at curbing aggressive tax planning than auditors without tax expertise. Therefore, we hypothesize that clients of signatory auditors with tax expertise are less tax-aggressive than clients of auditors who lack tax expertise.

Conclusions

We find that clients audited by tax-expert signatory auditors who only provide audit services are less tax aggressive than clients audited by non-tax experts. Consistent with a causal relation, we find that tax aggressiveness declines when mandatory auditor rotation results in switching to a tax-expert auditor. We also find that after an exogenous decrease in tax rates, which reduces clients’ incentives to engage in aggressive tax avoidance, the effect of tax expertise on tax aggressiveness weakens. In addition, while tax aggressiveness increases the incidence of tax-related restatements, tax-expert auditors attenuate this effect, consistent with tax-expert auditors mitigating the type of tax aggressiveness that increases misstatement risk. We also find that higher taxable income and a higher likelihood of tax-related audit adjustments are the channels through which tax-expert auditors constrain clients’ tax aggressiveness. Taken together, our findings fill a void in the literature and suggest that when signatory auditors only provide attestation services, their tax expertise reduces clients’ tax aggressiveness.

We note that our findings may not be directly generalizable to other settings. However, Lennox and Wu (2022) argue that “whether a study is likely to produce generalizable inferences hinges upon the nature of the theory being tested.” Because our theoretical prediction, which is that the engagement auditor’s tax expertise curbs tax aggressiveness, is not contingent upon the availability of the CTA-designation to capture auditors’ tax expertise, the generalizability concern is likely mitigated to some extent.

Abstract

While prior literature examines the role of certain incentives in motivating top managers (CEOs and CFOs) to engage in corporate tax avoidance, there is little evidence on the specific actions that managers take in response to these incentives. Motivated by the premise that a manager can influence a firm’s tax activities by directing resources towards the tax function, I investigate whether four specific tax avoidance incentives studied in prior literature (financial constraints, equity risk incentives, hedge fund interventions, and analyst cash flow forecasts) induce managers to make investments in hiring personnel within the firm’s tax department. Using a dataset of tax department employees collected from the professional networking website LinkedIn, I find evidence that each incentive is significantly associated with an increase in the number of individuals employed within the tax department. This association is generally stronger among higher ranked employees and employees with prior tax department experience. Overall, my findings are consistent with the premise that managers invest resources in the tax function when they are incentivized to avoid taxes. My study also provides some assurance that the association between tax avoidance incentives and effective tax rates documented in prior studies is reflective of intentional tax avoidance behavior.

Introduction

A large subset of the tax avoidance literature examines incentives that motivate top managers (CEOs and CFOs) to engage in corporate tax avoidance. The most common empirical approach in these studies is to examine the relationship between a specific incentive and tax planning outcomes of the firm, such as effective tax rates (ETRs). However, one drawback of this approach is that it provides no evidence regarding the specific actions that managers take in response to these incentives. Managers are unlikely to involve themselves directly in developing or implementing tax strategies given that they are rarely tax experts. Instead, the literature argues that they have a ‘tone at the top’ effect on the firm’s tax activities, which includes emphasizing the tax function when allocating resources across different functional areas of the firm (e.g. (Dyreng et al., 2010). Therefore, while prior studies focus on how tax avoidance incentives relate to outputs of the tax function (e.g. cash tax savings), managers will likely respond to these incentives by allocating resources to increase inputs into the tax function. Empirically, establishing an association between tax avoidance incentives and tax function inputs will provide stronger evidence regarding the effectiveness of these incentives. However, while tax function outputs are observable through publicly available financial statements, inputs are more difficult to measure.

In this study, I directly examine the relationship between tax avoidance incentives and inputs into the tax function – i.e. tax function investments. While investments in the tax function can be measured in different ways, I focus specifically on the quantity of tax personnel hired in the tax department. Indeed, (Mills et al., 1998) highlight that most tax function resources are allocated towards tax department personnel as opposed to outside assistance. The quantity of tax personnel hired is likely the most direct method of measuring tax department investments, has been shown in prior literature to be effective in generating tax savings (e.g. Chen et al., 2021, Barrios and Gallemore, 2023), and is publicly available through analyzing data from the professional networking website LinkedIn.

Conclusion

In this study, I examine whether managers respond to tax avoidance incentives by increasing investments made in the firm’s tax function, using the quantity of tax personnel employed as my primary measure. Using four types of incentives examined in prior literature – financial constraints, equity risk incentives, hedge fund interventions and analyst cash flow forecasts, and using a dataset of tax department employees collected from the professional networking website LinkedIn, I find that the quantity of tax personnel employed by the firm increases with each of the four incentives. My results are consistent with prior literature suggesting that managerial influence over firm tax planning is limited to ‘tone at the top’ effects, such as their ability to invest resources into the tax function.

Overall, my study complements prior literature examining these tax avoidance incentives by highlighting how inputs of the tax function respond to these incentives, in contrast with prior studies that only focus on outputs of the tax function (i.e. tax savings). The intuitive appeal of this approach is that it directly links these incentives with a specific managerial action, rather than the outcomes of these actions. The common definition of an ‘incentive’ involves the incitement of action and effort. However, since tax avoidance is not an area that managers generally specialize in, it is unlikely that managers exert effort personally in the development and execution of tax strategies. The results of my study suggest that the ‘action and effort’ incited by these incentives may be observable through an increase in tax personnel hiring, an indication that managers are allocating additional resources towards the tax function. Future researchers examining tax avoidance incentives may wish to strengthen their results by demonstrating, in conjunction with improved tax avoidance outcomes, that their incentive measure is related to an increase in tax function investments.

Abstract

The application of big data technology to global tax management is becoming increasingly widespread. China has been implementing increasingly mature technologies for tax governance using big data systems in recent years. By collecting data through web scraping on the earliest implementation times of big data tax administration in various provinces of China, we explore the relationship between big data tax administration and corporate bank credit in emerging markets. Our results show that big data tax administration enhances firms’ ability to obtain bank loans. Mechanism tests indicate that big data tax administration improves the quality of corporate information disclosure, facilitating access to bank credit loans. We find that big data tax administration improves the corporate financing environment, enhancing the efficiency of resource allocation in the credit market.

Introduction

The digital economy has expanded rapidly around the world. Driven by continuous upgrades in Internet functionality and the widespread application of big data, significant changes are occurring in governments, corporate business models and in people’s daily lives (Chen and Srinivasan, 2024). Taxation departments provide a good example of such changes, as big data technology is expanding the traditional auditing model. “Big data tax administration” combines big data with tax auditing; it involves acquiring big data from Internet platforms and integrating and comparing multiple sources of data (Bassey et al., 2022). Its implementation, which has become a new trend in national tax governance, reflects the modernization of national governance capabilities and systems within the tax system and significantly enhances the efficiency of governments’ tax collection (Canares, 2016). A key question is whether, looking beyond strict tax enforcement, modernized tax governance can guide firms to improve the quality of their information disclosure, thereby enhancing the efficiency of resource allocation in capital markets? Examining this question yields insights relevant to governments worldwide who are implementing governance based on big data technology.

Bank loans are an important financial resource and whether they are allocated in a timely and appropriate manner is an important issue from both theoretical and practical perspectives. An extensive body of research discusses the various factors that influence firm credit, including corporate characteristics and the policy environment. However, few studies explore whether innovations and modernizations within the tax governance system can improve the financing environment for firms. Studying the effects and mechanisms of big data tax administration on corporate bank credit enhances the understanding of the social effects of modernized governance and provides empirical evidence for the motivational impact of “tax administration with data” on firms.

Conclusions and implications

The widespread adoption and application of the Internet and big data have reduced the cost of information flow, and the multi-party storage and sharing of big data has gradually become a new form of social capital. The use of big data by tax authorities not only improves the capabilities and efficiency of tax collection but also promotes the rational allocation of financial capital at the national level and facilitates enterprise financing. We investigate the effects of big data tax administration on corporate credit and find that implementing big data tax administration (1) has a positive impact on corporate bank credit; (2) improves the quality of corporate information, thereby promoting corporate credit and (3) has a more pronounced effect on enterprises with stronger (vs. weaker) financial constraints. The conclusions of our study are beneficial because they enhance academic understanding of the economic consequences of big data tax administration, and also have practical significance for tax authorities actively seeking external forces to improve tax collection procedures. Based on our theoretical and empirical analyses, we put forward the following policy recommendations.

First, the government should enhance cooperation between tax authorities and third-party online platforms, synchronously strengthening tax administration under the “delegation, management and service” framework. We show that by enhancing information collecting capabilities, big data tax administration improves the quality of corporate information disclosure, thereby optimizing corporate financing efficiency. In the context of the digital transformation of enterprises and the increasing application of big data in society, tax inspection departments should make full use of the data at the societal level, engaging in cooperation with online platforms and online assessment agencies. By utilizing the correlation between multi-party data and the data provided by enterprises, tax inspection departments can strengthen their verification of corporate information. This will help eliminate the corporate practices of inflating projects and manipulating information disclosure, and encourage and guide firms to improve their information quality.

Abstract

The relationship between corporate income tax rates and innovation is a critical international issue. Existing studies often overlook the potential mechanisms of market competition and productivity heterogeneity. This paper addresses these gaps by integrating these elements into a unified mathematical analysis framework. Using China’s corporate income tax reform as a quasi-natural experiment, this study empirically tests the model. The findings reveal that decreases in tax rates significantly foster innovation, while increases have the opposite effect. The underlying mechanism involves market competition, with the impact of tax changes being more pronounced in firms with higher productivity. This study deepens the understanding of the nexus between corporate income tax and innovation, providing new insights to refine tax policies that promote innovative economic development globally.

Introduction

The adjustment of corporate income tax rates significantly impacts economic dynamics, influencing corporate investment strategies and innovation activities. Prior research underscores innovation’s crucial role in driving long-term economic growth and delineates the foundational contributions of tax policies to shaping economic landscapes, highlighting the substantial influences of tax adjustments on both resource allocation and innovative outputs [1–4]. Particularly, China’s monumental corporate income tax reform (CITR) in 2008, which standardized tax rates across domestic and foreign entities, provides a unique empirical setting to explore these effects due to its global economic stature and rapid development. This study critically evaluates how CITR influences corporate innovation by dissecting the direct and indirect mechanisms through which tax changes affect firms’ operational and strategic behaviors. Leveraging China’s 2008 CITR as a quasi-natural experiment, this research not only enhances understanding of the dynamic interactions between tax policies and corporate innovation activities but also informs precise, data-driven policy making to stimulate economic and innovative growth. Through a comprehensive analysis, informed by the empirical data from the CITR [5], this investigation is pivotal for its potential to guide global economic policy, given the scale of China’s economy and the extensive implications of its tax reforms.

Previous studies, such as those by Atanassov & Liu (2020) and Akcigit et al. (2022), have extensively explored how changes in corporate income tax rates impact corporate innovation directly, primarily through adjustments in funding and cost structures [6,7]. However, these studies have tended to overlook the indirect pathways through which tax policies affect innovation, particularly the mediating role of market dynamics. Additionally, there is a notable gap in understanding how these tax effects vary among firms with different levels of productivity. This oversight forms the basis of our research motivation, leading us to investigate the broader and more nuanced impacts of tax rate changes.

Results and discussion

4.1 Basic regression
Baseline results. In our baseline regression analysis, we rigorously evaluated the overarching impact of CITR on innovation, as detailed in Table 3. Initial results from columns (1)–(3), utilizing PAC as the dependent variable, reveal that the beneficial impact of a tax decrease (Tax-down#Post08) on PAC, though somewhat diminished with the progressive inclusion of control variables and bidirectional fixed effects, remains statistically significant at the 1 % level. This suggests that the reduction in corporate tax rate notably enhances corporate innovation, evidenced by a 7.31 % increase in PAC. Conversely, the detrimental impact of a tax increase (Tax-up#Post08) on PAC progressively intensifies and is also significant at the 1 % level, reflecting a substantial 9.08 % reduction in PAC due to the heightened corporate tax rate. Further analyses presented in columns (4)–(6), with PGC as the dependent variable, align with these findings. A decrease in the corporate income tax rate (Tax-down#Post08) significantly boosts PGC by 8.89 %, whereas an increase (Tax-up#Post08) correspondingly depresses PGC by 6.91 %.

Abstract

     What is the compliance effect of experiencing a tax audit? Empirical studies typically report a positive effect, while laboratory experiments frequently report a negative effect. We show experimentally that whether a tax audit increases or decreases subsequent compliance hinges on the balance of learning opportunities, misperception of audit risk, and the confounding effect of censoring. After an audit, taxpayers lower their perceived risk of audit – consistent with a bomb-crater effect – when audit selection is exogenous. However, for an endogenous audit rule under which taxpayers can learn to reduce their audit risk by reporting higher income, learning effects outweigh probability misperception, resulting in an increase in post-audit tax compliance. Finally, we show that accounting for censoring effects can eliminate on its own the negative post-audit compliance effect frequently observed in laboratory experiments.

Introduction

     Tax audits are an essential instrument in achieving compliance. While the threat of audit may itself alter compliance behavior, what effect, if any, does carrying out an audit have upon the future compliance of its target (the post-audit effect)?

Under conventional assumptions on risk aversion, the seminal Allingham-Sandmo (AS) analysis of tax compliance, Allingham and Sandmo (1972), predicts a zero post-audit effect for audited taxpayers who do not receive a fine, and a positive post-audit effect for fined taxpayers. Thus, empirically, the average post-audit effect is predicted to be positive, but potentially difficult to distinguish statistically from zero in samples where a high proportion of audits do not lead to fines. This prediction of a positive average post-audit effect is broadly in line with a growing empirical literature on post-audit effects, but discordant with experimental findings, which are instead consistent with a (weakly) negative average post-audit effect. Such seemingly contradictory findings in the existing evidence base on the post-audit effect are consequential for tax enforcement policy: audits are costly, so determining how many to do and how best to allocate them are key policy questions. If, as the experimental evidence suggests, auditing taxpayers reduces their subsequent compliance, this weakens the case for auditing, and strengthens the case for alternative compliance measures, e.g., enhanced taxpayer support. Also, tax administrations should seek to maximize the perceived risk of audit while at the same time minimizing the number of audits they actually perform. If, however, auditing increases compliance, as suggested in the empirical literature, tax administrations should seek to maximize the number of audits they actually perform.

Conclusion

     The sign and size of the post-audit effect is an important ingredient in determining optimal enforcement of the tax system. Prior literature has struggled to agree on the sign of the effect, however, with field studies generally pointing to a positive effect, but experimental findings often pointing to a negative effect.

As discussed in the Introduction, much of the existing field literature has the characteristic that findings indicating a positive post-audit effect are interpreted as signifying both (i) the presence of a rational deterrence effect, operating via learning; and (ii) the absence of a bomb-crater effect. Proceeding from this perspective, the apparent presence of the bomb-crater effect in laboratory outcomes must then be interpreted as evidence of a failure of external validity with respect to laboratory experiments. The perspective suggested by our findings is rather different. It is that evidence – both from the field and the laboratory – will simultaneously comprise effects due to learning, probability misperception (driving a bomb-crater effect), and censoring. It is only the sizes of these competing effects that may differ systematically between the field and the laboratory. This view is supported by the observation that, as we harmonize conditions in the laboratory towards those in the field (a process which would be expected to converge the sizes of the effects discussed with those observed in the field), our findings in the laboratory indeed converge towards those in the field. Moreover, from this alternative vantage, one might go as far as to argue that, in light of the systematic differences between laboratory and field settings in the existing literature, it would be more surprising were the outcomes from the experimental literature convergent with those from field studies, than were they divergent.

Abstract

This paper analyzes the relationship between tax evasion and the demand for cash by studying the effects of two measures to fight evasion: accessing taxpayers’ bank data and imposing thresholds for cash payments. We study the effects of these policies in Italy, where visibility of bank data and cash thresholds were recently increased. We show that both significantly affected cash holdings, which grew by about 1.5 percent of the GDP. Using unique high frequency data on cash operations and exploiting regional heterogeneity in tax evasion propensity, we find that accessing bank data pushes regions with higher propensity to evade taxes to convert more deposits into cash. On the contrary, higher cash thresholds do not increase cash holdings more in these regions. We rationalize the findings with a simple model of tax evasion and payment choices, where cash and deposits have different degrees of privacy.

Introduction

Despite the increasing use of electronic means of payment, cash is still widely used.1 If compared to other payment instruments, a unique feature of cash is its complete untraceability, which is highly valuable for hiding taxable transactions and wealth.2 While the role of tax evasion in the demand for cash has been widely explored, studies on the effects of measures to fight tax evasion on cash demand are scant.3

Anonymity in payments is a feature inherent to the use of cash: it provides a greater degree of privacy than other means of payment. On the contrary, the ability of different types of money to protect privacy varies, given that any payment system can shield the payee’s entire information set or a subset of that information. In fact, in account-based networks, the payer’s identity must be identified (Brunnermeier et al., 2021). If individuals are sensible to the number of observers, a demand for payment privacy and anonymity emerges (Borgonovo et al., 2021). In this context, the demand for privacy has two main sources: (i) a demand by individuals involved in illegal transactions, who try to reduce the probability of being incriminated (Masciandaro, 1999, Ardizzi et al., 2014b), and (ii) a demand by agents simply in search for protection from external scrutiny, not necessarily avoiding legal sanctions (Kahn, 2018). Indeed, it partially explains the emergence of new payment architectures and cryptographic procedures used to protect privacy, and the fact that they are viewed as close substitutes of cash for illegal transactions (Hendrickson and Luther, 2022). The literature on money and privacy has mainly focused on these aspects, that is, on improvement in privacy protection that leads to efficiency gains in the demand for money (Kahn et al., 2005), and recently on the introduction of central bank digital currency (Garratt and van Oordt, 2021), which can manage different degrees of financial privacy or different degrees of anonymity (Keister and Sanches, 2021). In this paper, we study tax evasion policies that interact with and alter the relative level of privacy between cash and deposits.

Effects on regions with heterogeneous tax evasion propensity

After having secured enough evidence on H1 and H2, we test H3 and H4. Given that we cannot observe cash demand and tax evasion at the individual economic agent level, we exploit variation across Italian regions in terms of tax evasion propensity to see whether changes in bank data visibility and cash thresholds had a higher impact on cash demand in regions with higher or lower propensity to evade taxes. Finding higher effects in regions where tax evasion is higher (lower) would support the idea that higher cash demand following policy implementation is driven by evaders’ (compliers’) behavior.

Measures of tax evasion are notoriously imprecise, because of its intrinsic opacity. There are several ways to approximate tax evasion propensity and a long debate has been opened about how to measure unreported, non-observed, underground, illegal, informal, shadow, and unrecorded economies.32 Our goal here is not to contribute to this debate, but to find a reliable approximation that captures the main differences between Italian regions. A way to approximate tax evasion propensity is through the non-observed economy, for which an estimate at the regional level for the period under analysis is produced and used by reliable institutions in Italy, oppositely to other measurements. In addition, considering the non-observed economy allows us to capture cash demand of agents operating in the illegal and informal economies among the others (see the examples in Section A of the online appendix).

Abstract

1 | INTRODUCTION

2 | THE EARNED INCOME TAX CREDIT AND ITS EFFECTS

3 | DATA AND MODEL

4 | RESULTS

5 | DISCUSSION

ACKNOWLEDGMENTS

REFERENCES

Abstract

The Earned Income Tax Credit (EITC) transferred more than $67 billion to taxpayers in 2016. We estimate changes in spending that occur following EITC disbursement. We make three key advances in identifying the effect: using estimated EITC dollar benefits to differentiate the impact of low from high benefits; estimating the impact by liquid assets; and, employing a triple-difference model around the 1993 expansion and a separate triple-difference model over the number of children. We find that the EITC acts as supplementary SNAP benefits for those with small EITC benefits, while those with larger benefits increase spending on durables, particularly automobiles.

1 | INTRODUCTION

The Earned Income Tax Credit (EITC) is one of the largest anti‐poverty programs for working age adults with children, transferring more than $67 billion per year (IRS, 2017). In 2018, the EITC along with the Child Tax Credit lifted 5.6 million individuals out of poverty, including over 3 million children, and reduced the severity of poverty for another 16.5 million people, including 6.1 million children (Center on Budget and Policy Priorities, 2019). The EITC transfers result in several beneficial impacts for recipients based on both the direct impact of the transfers but also through increasing earnings and employment. The greatest impacts tend to be for households with earnings up to the threshold phaseout part of the schedule ($18,340 dollars of earnings per year for a two dependent child household), which are more likely to be female‐headed single parent households, as well as for households without a member previously in the labor force (Dickert et al., 1995; Eissa & Hoynes, 2006). There is some evidence that likelihood of EITC receipt increases in economic downturns—enabling it to act as a social safety net (Bitler et al., 2017). Other benefits of the EITC include positive impacts on children’s test scores (Chetty et al., 2011; Dahl & Lochner, 2008).

Abstract

     Despite the unambiguous predictions of the canonical model of a competitive labor market, empirical studies of the labor market effects of payroll taxation provide conflicting evidence. We estimate the labor market impacts of payroll taxation in Singapore, the country with the most competitive and flexible labor market among the countries investigated in the literature. By exploiting the sharp reduction in payroll tax rate when workers turn 60, we find that the reduced payroll tax rate in Singapore has a large effect on wages without changes in employment. Our meta-analysis shows consistent evidence that varying degrees of labor market competitiveness across places and time could explain the mixed results in the literature. Our findings corroborate the prediction of the canonical model that the welfare costs of social insurance programs financed by payroll taxes can be small in a competitive labor market.

Introduction

     Most social insurance programs, such as old-age pension and health, disability, and unemployment insurance, are financed by payroll taxes (or social security contributions). These payroll taxes often account for more than 30% of workers’ labor income and about a quarter of the total tax revenue of OECD member countries (Saez et al., 2019). Although social insurance programs play an important role in improving social welfare, the payroll taxes levied to finance those programs can distort the labor market.

     In the canonical model of a competitive labor market, workers have an incentive to increase (decrease) their labor supply depending on how they value their social insurance benefits when the payroll tax rate increases (decreases). Thus, employers’ additional labor costs due to higher payroll taxes can be shifted to workers through reduced wage payments. If workers regard the payroll taxes borne by their employers as their social insurance benefits, the incidence of payroll taxes will fall solely on workers’ wages. This leaves employment or work hours unchanged, thereby minimizing deadweight loss in the labor market (Summers, 1989).

     Several empirical studies have tested Summers’ (1989) insights into the labor market impacts of payroll taxes to finance worker benefits across various countries and time periods and found mixed results. One possible explanation to reconcile the mixed findings in the literature is discrepancies in labor market institutions between the real world and the theoretical model. Although the canonical payroll tax incidence model assumes a perfectly competitive labor market, competitiveness in an actual labor market varies across countries, demographic groups, and time periods.

Conclusion

     Despite clear predictions under the canonical model of a competitive labor market, existing empirical studies have provided mixed evidence on how much a payroll tax change is shifted to workers’ wages. One possible explanation for this discrepancy is the heterogeneity in labor market flexibility across countries and time. To better understand the role of market flexibility or competitiveness, we investigate the labor market impact of payroll taxation in Singapore, where the labor market is considered more competitive and flexible than in any other country investigated in the literature. We document that saved labor costs via the reduced payroll tax rate largely shifts to workers’ wages. The estimated pass-through rate in Singapore is 77.5%, which is similar to the weighted average pass-through rate of the studied countries where wage bargaining predominantly takes place at the local or firm level, as in Singapore. These findings indicate that labor market competitiveness can play a significant role in determining the labor market impact of payroll taxation. A policy implication is that labor market distortion due to payroll taxation would be small when the labor market is competitive.

Abstract

     A widespread perception exists that tax havens facilitate corporate opacity. This study provides new evidence on the association between tax havens and the transparency of firm financial reporting using a unique group of firms whose parent companies are incorporated in tax havens but whose headquarters or primary operations—that is, their base—are in nonhaven countries. While most research suggests a negative association between tax havens and transparency, I examine whether this association depends on the firm’s corporate governance environment as well as its capital market incentives. I find that the negative association is limited to firms subject to weak governance in the base country. In contrast, I find, among firms in stronger governance environments, a positive association between tax haven incorporation and transparency, which is most concentrated among firms with greater capital market incentives. My findings suggest that future researchers should use caution when assuming an unambiguous negative association between tax havens and corporate transparency. The study also provides unique evidence that tax planning can motivate higher transparency in certain settings.

Introduction

     A widespread belief exists that firms’ use of tax havens facilitates corporate opacity. Tax havens have unique regulations that can weaken shareholders’ ability to discipline managers and directors and can provide opportunities for reduced reporting quality or disclosure for tax haven–incorporated companies (Kun 2004; Moon 2018), which may motivate their managers to be less transparent. Many observers, including researchers, policymakers, and the media, have expressed concerns that tax havens let managers misbehave and hide information from financial statement users (e.g., Desai 2005; Morgenthau 2012; Black et al. 2013; Durnev et al. 2016, 2017; Atwood and Lewellen 2019). For example, the U.S. Senate has argued that the unique laws of tax havens can be used to circumvent U.S. securities safeguards, including disclosure requirements (U.S. Senate Permanent Subcommittee on Investigations 2006). Many sources also suggest that tax haven–incorporated companies provide financial information that is unreliable or insufficient to portray a firm’s economic situation.

Conclusion

     I provide new evidence on the association between tax haven use and financial reporting transparency using a unique sample of “tax haven firms” with tax haven–incorporated parents that are based primarily in a nonhaven country. I examine whether the association between tax haven incorporation and transparency is conditional on the firm’s corporate governance environment and capital market incentives. My results indicate that the association between tax haven incorporation and transparency depends on the strength of governance in the base country (i.e., the nonhaven country of headquarters or primary operations), in conjunction with capital market incentives. While I find an overall negative association between tax haven incorporation and transparency in the full sample, I find that firms facing weak country-level governance in the base country drive the baseline negative association. In contrast, I find that capital market incentives motivate tax haven firms to provide highertransparency, compared to other multinationals, among firms based in strong governance countries and firms based in weak governance countries with less severe potential internal governance problems. My study provides evidence that low transparency associated with tax havens is not ubiquitous, and the findings suggest that future researchers should use caution when assuming an unambiguous negative association between tax havens and transparency.

Highlights

Abstract

Keywords

JEL Classifications

1. Introduction

2. Background

3. Research design

4. Empirical results

5. Conclusion

Declaration of Competing Interest

References

Abstract

This study examines whether tax haven use by Australian financial corporations is associated with the pricing of audit and non-audit services. It also analyzes whether the existence of financial corporations’ suspicious matters reports (SMRs) and whistle blower hotline facilities moderate the association between tax haven use and pricing of audit and non-audit services. We find a positive association between tax haven use and the pricing of audit and non-audit services. Our results are economically significant. For example, audit fees for financial corporations with tax haven use is around 23 per cent higher compared to corporations with no tax haven use, while non-audit fees for financial corporations with tax haven use is around 13 per cent higher compared to corporations with no tax haven use. We also find that the existence of SMRs and whistle blower hotline facilities both moderate the positive association between tax haven use and audit pricing. Overall, our results suggest that tax haven use has serious consequences for financial corporations’ pricing of audit and non-audit services, whereas SMRs and whistle blower hotline facilities assist corporations to reduce the risks concerning tax haven use.

1. Introduction

Tax haven1 use by multinational corporations (MNCs) typically involves the concealment of the nature and origin of funds, which makes it difficult for tax authorities to determine the source and applicable tax liability relating to those funds (De Simone et al., 2019). Tax havens are characterized by secrecy in banking practices, a weak regulatory framework and a zero (or nominal) tax rate, so they represent ideal jurisdictions for MNCs to retain funds offshore, in addition to conducting earnings management, money laundering and tax evasion activities (Desai, 2005; Desai et al., 2006a; 2006b; 2016; Department of Treasury, 2015; De Simone et al., 2019). At the extreme, subsidiaries incorporated in tax haven jurisdictions by MNCs could be responsible for the treasury function of the corporate group as a whole. We are motivated to conduct this study for several reasons. First, Oxfam Australia estimates that Australian corporations have used tax havens to avoid around AUD $4.8 billion in corporate taxes in 2014, accounting for about 90 percent of corporate profits (Oxfam, 2014). We argue that tax haven use facilitates large agency problems in MNCs (e.g., rent extraction and/or resource diversion by managers), as the benefits of doing so are likely to be greater than the costs (Dyreng and Lindsey, 2009; Lisowsky, 2010; Lisowsky et al., 2013). The use of tax havens provides managers with opportunities to engage in rent extraction or resource diversion (Dharmapala and Hines, 2009; Atwood and Lewellen, 2019; Wood and Lewellen, 2019). Associated financial reporting obfuscation then makes it more difficult for audit firms to fully assess MNCs risks, leading to increased audit risk and increases in the pricing of audit and non-audit services. Thus, it is important to determine whether Australian financial corporations’ use of tax havens is associated with the pricing of audit and non-audit services

1- Introduction

2- Truth-telling oath procedure

3- Experiment 1: One-shot tax declaration

4- Experiment 2: repeated tax declaration

5- Conclusion

References

Abstract

Using two earned income/tax declaration experimental designs we show that only partial liars are affected by a truth-telling oath, a non-price commitment device. Under oath, we see no change in the number of chronic liars and fewer partial liars. Rather than smoothly increasing their compliance, we also observe that partial liars who respond to the oath, respond by becoming fully honest under oath. Based on both response times data and the consistency of subjects when several compliance decisions are made in a row, we show that partial lying arises as the result of weak preferences towards profitable honesty. The oath only transforms people with weak preferences for lying into being committed to the truth.

Introduction

Dishonesty erodes opportunities for economic gains in business and society.1 Scandals like Enron and the 2008 financial crisis have prompted the promotion of truth-telling oaths–a non-price commitment device, as well as similar pledges, or codes of conduct, like the MBA oath or Dutch Bankers oath (see e.g., McCabe et al., 2002; Shu et al., 2012; Cohn et al., 2014).2 Empirical evidence confirms that when people voluntarily commit to honesty through a solemn oath, they tell the truth most of the time, holding the lie constant (see e.g., Jacquemet et al., 2018).3 The rationale is that the oath will help promote greater economic exchange by triggering a person’s intrinsic commitment to telling the truth (i) by reducing the ability to rationalize a lie (i.e., self-justification), and (ii) by coupling the desire for a positive self-image together with the desire for consistency (Mazar et al., 2008). But not all lies are the same—a small lie is easier than a big lie (Lundquist et al., 2009; Gneezy et al., 2018; Abeler et al., 2019). And not all liars are the same—some people lie all the time, some never, and some waver between lying and the truth, depending. The open question we address is who actually responds to an oath with honesty, and why. Using an earned income/tax declaration lab experiment, we find that the oath only affects partial liars, not full liars.4 What is more, partial liars do not react to the oath by smoothly increasing their level of compliance under oath (as a homogeneous change in the cost of lying would predict), but rather jump to full compliance. We argue this is consistent with partial compliance arising from weak preferences for profitable dishonesty—partial liars seem to lack clarity about how to process profitable dishonesty, which suggests they were neither committed to lying nor to being truthful 100%. Their preferences were fungible—and the oath acted as a moral anchor, so that we observe fewer partial liars and more full truth tellers under oath than without the oath.