The Tax Elasticity of Financial Statement Income: Implications for Current Reform Proposals

2020 ◽  
Vol 73 (4) ◽  
pp. 1047-1064
Author(s):  
Dhammika Dharmapala
Keyword(s):  
Conceptual Framework ◽  
Welfare Analysis ◽  
Financial Statement ◽  
Deadweight Loss ◽  
Corporate Tax ◽  
Taxable Income ◽  
Relevant Evidence ◽  
Elasticity Of Taxable Income ◽  
Current Reform

Current reform proposals in international and corporate tax (most notably the Organisation for Economic Co-operation and Development’s Global Anti-Base Erosion proposal) envisage taxing financial statement income. This paper develops a conceptual framework, based on the literature on the elasticity of taxable income (ETI), for the welfare analysis of such proposals and discusses the available evidence on the tax elasticity of financial statement income. The central conclusion is that the most relevant evidence suggests a large responsiveness of financial statement income to taxes (and, hence, albeit with significant limitations and caveats, arguably a large deadweight loss). The paper also highlights the need for more evidence on this question.

Does Evasion Invalidate the Welfare Sufficiency of the ETI?

2016 ◽  
Vol 16 (4) ◽  
Author(s):  
Christian Gillitzer ◽  
Joel Slemrod
Keyword(s):  
Economic Policy ◽  
Risk Aversion ◽  
Tax Evasion ◽  
Income Elasticity ◽  
Deadweight Loss ◽  
Sufficient Statistic ◽  
Taxable Income ◽  
Elasticity Of Taxable Income ◽  
Efficiency Cost ◽  
Economic Journal

Abstract In an influential article, Raj Chetty (2009, “Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance.” American Economic Journal: Economic Policy 1 (2):31–52) argues that in the presence of tax evasion the elasticity of taxable income (ETI) is no longer a sufficient statistic for the marginal efficiency cost of funds (MECF). We show that, under Chetty’s (2009, “Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance.” American Economic Journal: Economic Policy 1 (2):31–52) risk-neutrality assumption, correctly measuring the standard MECF only requires adding detected evasion inclusive of penalties. In the more general case of risk aversion, it further requires amending the formula to address the private risk-bearing cost of tax evasion.

Incorporating Financial Statement Information to Improve Forecasts of Corporate Taxable Income

2020 ◽  
Author(s):  
Danielle Green ◽  
Erin Henry ◽  
Sarah Parsons ◽  
George A. Plesko
Keyword(s):  
Financial Statement ◽  
Taxable Income

scholarly journals The Elasticity of Taxable Income: A Meta-Regression Analysis*

2021 ◽  
Author(s):  
Carina Neisser
Keyword(s):  
Regression Analysis ◽  
Policy Analysis ◽  
Selective Reporting ◽  
Tax Base ◽  
Taxable Income ◽  
Income Elasticities ◽  
Elasticity Of Taxable Income ◽  
Meta Regression ◽  
Meta Regression Analysis ◽  
Key Parameter

Abstract The elasticity of taxable income (ETI) is a key parameter in tax policy analysis. To examine the large variation found in the literature of taxable and broad income elasticities, I conduct a comprehensive meta-regression analysis using information from 61 studies containing 1,720 estimates. My findings reveal that estimated elasticities are not immutable parameters. They are correlated with contextual factors and the choice of the empirical specification influences the estimated elasticities. Finally, selective reporting bias is prevalent, and the direction of bias depends on whether deductions are included in the tax base.

Inferring U.S. Tax Liability from Financial Statement Information

2009 ◽  
Vol 31 (1) ◽  
pp. 29-63 ◽  
Author(s):  
Petro Lisowsky
Keyword(s):  
Stock Options ◽  
Accounting Standards ◽  
Financial Statements ◽  
Income Taxes ◽  
Financial Accounting ◽  
Financial Statement ◽  
Corporate Tax ◽  
Data Set ◽  
Accounting For Income Taxes ◽  
Tax Expense

Abstract: Using a multi-year matched tax return-financial statement data set, this study builds empirical models that infer U.S. tax liability on the corporate tax return from publicly available financial statement disclosures, including those of Statement on Financial Accounting Standards No. 109, Accounting for Income Taxes. Results show that current U.S. tax expense, the tax benefit from stock options, current-year tax cushion accrual, consolidation book-tax differences, and R&D are informative in inferring actual tax, while intraperiod tax allocation is not. Additionally, the sign of pretax book income and the existence of net operating loss carryforwards are useful partitioning variables in estimating actual tax. In general, for every dollar of current U.S. tax expense reported on the financial statements, approximately $0.70 is reported in U.S. tax liability on the tax return. The models are validated using a holdout sample, providing support for the notion that public parties can reliably use these results to estimate a firm's tax position. Additional tests reveal a hierarchy of subsamples that researchers may employ when maximizing the usefulness of tax-related disclosures in inferring U.S. tax liability.

scholarly journals An Empirical Analysis Of The Impact Of Tax Rates On Subchapter S Elections

2011 ◽  
Vol 11 (2) ◽  
pp. 84
Author(s):  
Linda Burilovich
Keyword(s):  
Small Businesses ◽  
Tax Rates ◽  
Corporate Tax ◽  
Double Taxation ◽  
Trade Off ◽  
Taxable Income ◽  
Corporate Form ◽  
Empirical Tests ◽  
The Impact ◽  
Loss Firms

Selecting the appropriate form of organization may be a difficult choice for a small business firm. The corporate form offers legal liability but imposes double taxation. The choice often becomes a trade-off between the nontax benefits of incorporating and the costs of double taxation. Certain small businesses qualify to make an election under Subchapter S of the tax code which allows them to operate as a corporation, but avoid the corporate tax by passing through taxable income or loss to shareholders. These firms are known as S corporations. This article examines the impact of personal and corporate tax rates on the propensity for small businesses to elect to operate as S corporations. The behavior of gain and loss firms is analyzed separately. Empirical tests suggest that tax rates do have a significant and sometimes surprising impact on this choice. These findings have significance for policymakers in attempting to reduce the costs of taxes to new firms which may be inhibited from entering the market due to the impact of double taxation.

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