Journal Article Encouragement to Industry by Exemption from Taxation Get access John Burton Phillips John Burton Phillips University of Colorado, Boulder, Colorado Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 19, Issue 3, May 1905, Pages 498–500, https://doi.org/10.2307/1882663 Published: 01 May 1905

This study investigates whether compensating chief executive officers and business-unit managers using after-tax accounting-based performance measures leads to lower effective tax rates, the empirical surrogate used for tax-planning effectiveness. Utilizing proprietary compensation data obtained in a survey of corporate executives, the relation between effective tax rates and after-tax performance measures is modeled and estimated using a two-step approach that corrects for the endogeneity bias associated with firms' decisions to compensate managers on a pre- versus after-tax basis. The results are consistent with the hypothesis that compensating business-unit managers, but not chief executive officers, on an after-tax basis leads to lower effective tax rates.

[This paper examines the effects of banning contingent fees for tax return preparation services. The paper presents a principal-agent model in which a taxpayer contracts with a tax practitioner to attempt to resolve tax law uncertainty. The optimal contract provides incentives for the practitioner to do research and to choose the tax return reporting position that the taxpayer prefers. Analysis of the model shows that banning contingent fees raises the expected fee of the practitioner. The amount of this increase is increasing in the quality of the practitioner. Conventional wisdom holds that contingent fee arrangements will lead to an increase in tax undercompliance. In contrast, we find that undercompliance decreases when contingent fees are allowed.]

This paper examines the effects of banning contingent fees for tax return preparation services. The paper presents a principal-agent model in which a taxpayer contracts with a tax practitioner to attempt to resolve tax law uncertainty. The optimal contract provides incentives for the practitioner to do research and to choose the tax return reporting position that the taxpayer prefers. Analysis of the model shows that banning contingent fees raises the expected fee of the practitioner. The amount of this increase is increasing in the quality of the practitioner Conventional wisdom holds that contingent fee arrangements will lead to an increase in tax undercompliance. In contrast, we find that undercompliance decreases when contingent fees are allowed.

We assess the usefulness of deferred tax expense in detecting earnings management. Assuming greater discretion under GAAP than under tax rules, and assuming managers exploit such discretion to manage income upward primarily in ways that do not affect current taxable income, then such earnings management will generate book-tax differences that increase deferred tax expense. Our results provide evidence consistent with deferred tax expense generally being incrementally useful beyond total accruals and abnormal accruals derived from two Jones-type models in detecting earnings management to avoid an earnings decline and to avoid a loss. Only total accruals is incrementally useful in detecting earnings management to meet analysts' earnings forecasts. Deferred tax expense is more accurate than the accrual measures in classifying firm-years as successfully avoiding a loss, whereas no one measure is more accurate in classifying firm-years as avoiding an earnings decline or meeting analysts' forecasts.

ABSTRACT: Prior research has separately examined pretax earnings management activities that have current taxable income consequences (book-tax “conforming earnings management”) and those that do not have current taxable income consequences (book-tax “nonconforming earnings management”). Our study documents the prevalence of, and then investigates the firm-specific characteristics that impact the choice between, these earnings management strategies. We utilize a sample of firms that restated their earnings downward due to accounting irregularities and thus can be presumed to have managed earnings upward. We find that nonconforming earnings management is more prevalent and that firms trade off the net present value of tax benefits against the net expected detection costs associated with nonconforming earnings management. In particular, firms having NOL carryforwards, using a high-quality auditor, or engaging in the most egregious misstatements rely less on nonconforming earnings management strategies. We also find that book-tax differences are useful in predicting restatements.