scholarly journals Corporate Taxes and the Earnings Distribution: Effects of the Domestic Production Activities Deduction

2021 ◽  
Vol 2021 (077) ◽  
pp. 1-85
Author(s):  
Christine L. Dobridge ◽  
◽  
Paul Landefeld ◽  
Jacob Mortenson ◽  
◽  
...  
Keyword(s):  
Capital Investment ◽  
Small Firms ◽  
Substantial Effect ◽  
Large Firms ◽  
Rate Reduction ◽  
Corporate Tax ◽  
Domestic Production ◽  
Tax Rate ◽  
Earnings Distribution ◽  
The U.S

This paper investigates how corporate tax changes affect workers’ earnings. We use a dataset of U.S. worker-level W-2 filings matched with corporate tax returns and study the implementation of the Domestic Production Activities Deduction (DPAD). We find the DPAD tax rate reduction has a substantial effect on the distribution of annual wage earnings within a firm. Earnings of workers at the top of their firm’s earnings distribution rise relative to those at the bottom of the distribution. We estimate a semi-elasticity of average earnings of 1.1 with respect to the DPAD marginal tax rate reduction, while the semi-elasticity of median earnings is notably smaller—0.5. Furthermore, we estimate a semi-elasticity of 1.3 at the 95th percentile of workers’ earnings and 2.7 at the 99th percentile. This trend of larger semi-elasticities at the top of the earnings distribution is especially pronounced for small firms. Looking at overall employment effects, we see no change overall, but the number of employees rises at small firms and declines at large firms. In contrast, we find that capital investment rises for large firms, suggesting that the DPAD also resulted in domestic capitallabor substitution for large corporations. Our paper has significant implications for assessing the progressivity of the U.S. tax code and for analyzing the effect of corporate tax policy changes on the U.S. income distribution.

scholarly journals Abuses and Penalties of a Corporate Tax Inversion

2019 ◽  
Vol 7 (1) ◽  
pp. 5
Author(s):  
James Yang ◽  
Leonard Lauricella ◽  
Frank Aquilino
Keyword(s):  
Multinational Corporations ◽  
International Taxation ◽  
Internal Revenue Service ◽  
Tax Law ◽  
Corporate Tax ◽  
Tax Base ◽  
Tax Rate ◽  
Tax Savings ◽  
Treasury Department ◽  
The U.S

There is a serious problem in international taxation today. Many United States (U.S.) multinational corporations have moved abroad to take advantage of a lower tax rate in a foreign country. As a consequence, the tax base in the U.S. has been seriously eroded. This practice is known as “corporate tax inversion”. This paper discusses the abuses and penalties of this phenomenon. It is rooted in some deficiencies in the U.S. tax law. This paper points out that the U.S. has the highest corporate tax rate in the world. It imposes tax on worldwide income. It permits deferral of tax on foreign-sourced income until dividends are repatriated back to the U.S. As a result, it creates tax loopholes. This paper reveals six actual cases of corporate tax inversion. This practice has triggered the Congress to enact §7874, the Internal Revenue Service (IRS) to issue Notices IR 2014-52 and IR 2015-79, and the U.S. Treasury Department to promulgate TD 9761. This paper investigates some details of these penalties. This paper further demonstrates an example in determining the amount of tax savings by engaging in a corporate tax inversion. It also offers many strategies.

Microsoft's Foreign Earnings: Tax Strategy

2015 ◽  
Vol 30 (4) ◽  
pp. 297-310 ◽  
Author(s):  
Larissa S. Kyj ◽  
George C. Romeo
Keyword(s):  
Multinational Corporations ◽  
Transfer Pricing ◽  
Corporate Tax ◽  
Tax Havens ◽  
Tax Rate ◽  
Foreign Earnings ◽  
Microsoft Corporation ◽  
A Company ◽  
Foreign Corporation ◽  
The U.S

ABSTRACT The high corporate tax rate and the complexity of the U.S. tax code provide U.S. multinationals with the incentives and opportunities to shift income to foreign low-tax jurisdictions. In theory, U.S. corporations are taxed at the statutory rate of 35 percent on their worldwide income, but income earned by an active Controlled Foreign Corporation (CFC) is usually not taxed until it is repatriated to the parent company in the U.S. As a result, trillions of dollars in cash and investments sit in offshore companies, awaiting a repatriation tax holiday. Much of these earnings are held by technology companies. The case looks at Microsoft Corporation, a company with $60.8 billion in unrepatriated earnings as of 2012. The case considers tax havens, nonrepatriation of earnings, cost-sharing arrangements, and transfer pricing and is intended to expose students to the subtleties and complexities of corporate tax strategies. Although the case is set in 2012, the goal of the case is to demonstrate to the students the complex environment in which multinational corporations operate and is independent of any particular tax regime.

Selecting a Tax Rate for Use in Analyzing Forest Industry Capital Investment

1986 ◽  
Vol 3 (3) ◽  
pp. 101-103 ◽  
Author(s):  
Bruce G. Hansen
Keyword(s):  
Capital Investment ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Substantial Effect ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Investment Performance ◽  
Tax Rate ◽  
Federal Income Tax ◽  
Considerable Discussion

Abstract The tax rate utilized in capital budgeting studies has a substantial effect on investment performance as estimated by the net present value (NPV) and internal rate of return (IRR). Selecting the incorrect federal income tax rate can have a profound effect on investment decisions. Although there is currently considerable discussion in Congress about changing the present tax structure, the consequences of selecting an incorrect tax rate will prevail so long as there is a graduated schedule of any kind. North. J. Appl. For. 3:101-103, Sept. 1986.

Tax Rates in Small and Large Firms

1987 ◽  
Vol 12 (2) ◽  
pp. 41-52 ◽  
Author(s):  
Davinder Singh ◽  
Ronald P. Wilder ◽  
Kok Poh Chan
Keyword(s):  
Firm Size ◽  
Small Firms ◽  
Manufacturing Industry ◽  
Size Group ◽  
Tax Rates ◽  
Large Firms ◽  
Corporate Tax ◽  
Industry Group ◽  
Administrative Expenses ◽  
The Relationship

This study examines the relationship between firm size and tax rates. Contrary to other recent studies, these findings demonstrate that corporations in the smallest size group pay the highest effective corporate tax rates. 1 It is suggested that the higher tax rates of small firms can be explained in terms of selling, general and administrative expenses. Selling, general and administrative expenses as a ratio to sales are more than 50% higher for small corporations than for the largest firms in the non-durable manufacturing industry group.

Earnings Management in Response to Corporate Tax Rate Reduction Under an Imputation Tax System

2019 ◽  
Vol 54 (01) ◽  
pp. 1950002
Author(s):  
Nan-Ting Kuo ◽  
Cheng-Few Lee
Keyword(s):  
Earnings Management ◽  
Tax Avoidance ◽  
Rate Reduction ◽  
Rent Extraction ◽  
Corporate Tax ◽  
Tax System ◽  
Tax Rate ◽  
Tax Benefits ◽  
Tax Savings ◽  
Institutional Shareholders

Our study explores how firms respond to a tax rate reduction under an imputation tax system. By exploring Taiwanese data, we find that firms engage in significant downward earnings management preceding a tax rate reduction, and this earnings management behavior reverses in the following year. We further explore what factors drive this finding, given that corporate tax avoidance reduces shareholder imputation credits and thus generates limited tax benefits to most shareholders. We argue and find evidence that three factors explain the tax-induced earnings management: (1) financing benefits from tax savings, (2) managerial rent extraction, and (3) the influence of foreign and domestic institutional shareholders. Our results suggest that factors other than shareholder tax benefits have significant effects on corporate tax avoidance, suggesting that firms still have strong incentives to avoid taxes under an imputation tax system.

Earnings management around tax rate reduction: evidence from China's 2007 corporate tax reform

2014 ◽  
Vol 22 (3) ◽  
pp. 304-317 ◽  
Author(s):  
Tao Zeng
Keyword(s):  
Earnings Management ◽  
Tax Reform ◽  
State Ownership ◽  
Fourth Quarter ◽  
Real Earnings Management ◽  
Rate Reduction ◽  
Corporate Tax ◽  
Content Type ◽  
Tax Rate ◽  
Statutory Tax Rate

Purpose – The purpose of this paper is to examine earnings management around tax rate reduction in the wake of the 2007 corporate tax reform in China. Design/methodology/approach – This paper is an empirical work using a sample of listed Chinese real estate firms. Findings – This study finds that firms managed earnings, including accrual-based earnings management and real earnings management, to decrease income in the fourth quarter of 2007, and to increase income in the first quarter of 2008. It suggests that the real estate firms were shifting income from the fourth quarter of 2007, when the statutory tax rate was 33 per cent, to the first quarter of 2008, when the statutory tax rate was 25 per cent, and therefore saved on tax payments. It also finds that corporate ownership structures, including ownership concentration and state ownership, affect earnings management. In the fourth quarter, state ownership is negatively associated with accrual-based earnings management, while ownership concentration is positively related to both accrual and real earnings management. In the first quarter, state ownership is negatively related to real earnings management. Social implications – Tax authority and policy makers might be interested in evidence on earnings management around tax rate reduction. Changes in tax rates increase the incentives to shift income, which may warrant a closer scrutiny by both outside auditors and tax auditors. Originality/value – This paper is the first study that relates to both accrual-based earnings management and real earnings management to corporate tax rate changes by showing that firms manipulate income upward in the low-tax-rate periods and downward in the high-tax-rate periods.

scholarly journals IMPACT OF CORPORATE TAXATION ON UNEMPLOYMENT

2017 ◽  
Vol 18 (3) ◽  
pp. 412-426 ◽  
Author(s):  
Aras ZIRGULIS ◽  
Tadas ŠARAPOVAS
Keyword(s):  
Capital Investment ◽  
Research Problem ◽  
Corporate Taxation ◽  
Tax Rates ◽  
Negative Effects ◽  
Corporate Tax ◽  
Data Set ◽  
Tax Rate ◽  
International Tax Competition ◽  
General Method Of Moments

We study the effect of corporate taxation on unemployment utilizing a dynamic panel covering 41 countries over 11 years. The purpose of this article is to investigate how changes in the corporate income tax affect unemployment. We employ system general method of moments (GMM) due to peculiarities of the data set and the endogeneity issues present in the research problem. We find that a rise in the effective average corporate tax rate significantly increases unemployment levels, which directly contradicts past findings of some seminal authors. In addition, the present research supports findings of past studies on capital tax elasticity that obtained similar insights using differing methodologies. This research lays the groundwork for future studies, which may take the same methodology and apply it to even larger international panels. This research implies that international tax competition is affecting unemployment, presumably through its effects on international capital investment. These results provide support for policy makers who may be wary of raising corporate tax rates in countries where capital is especially mobile because of the negative effects which may accumulate to the voting public in the form of unemployment.

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