ABSTRACT Research on the determinants of tax avoidance have relied on tests using GAAP and cash effective tax rates (ETRs) and total and permanent book‐tax differences. Two new proxies have emerged that overcome documented limitations of these proxies: one, developed by Henry and Sansing (2018), allows for more meaningful interpretation of results estimated in samples that include loss observations. The other, reserves for unrecognized tax benefits (UTB), provides new data on tax uncertainty. We offer empirical evidence on how well tests using these new proxies perform relative to those extensively used in prior research. The paper finds that tests using the proxy developed by Henry and Sansing (2018) have lower power relative to those using other proxies across all samples, including a sample that includes loss observations. In contrast, when firms accrue reserves for uncertain tax avoidance, tests using the current‐year addition to the UTB have the highest power across all proxies, samples, and levels of reserves. In the absence of reserves, tests using the GAAP ETR best detect uncertain tax avoidance, on average. This study contributes to the literature by using a controlled environment to provide the first large‐scale empirical evidence on how the power of tests varies with the use of relatively new proxies, the inclusion of loss observations, and the advent of FIN 48.

ABSTRACT As part of the Tax Cuts and Jobs Act (TCJA), the US Congress repealed a long‐standing exception that allowed companies to deduct executives' qualified performance‐based compensation in excess of $1 million. The purpose of this study is to examine whether Congress achieved its stated objective of reversing a shift in executive compensation away from cash compensation and toward performance pay, which Congress believed led executives to focus on short‐term results rather than the long‐term success of the company. Across a battery of tests, including a difference‐in‐differences design that exploits the staggered time‐series implementation of the deduction limit, we find evidence compatible with the new deduction limit having no effect on executives' salary, performance pay or total compensation, inconsistent with Congressional intent. Our results suggest that taxes are not a first‐order effect of executive pay and that tax regulation could be relatively ineffective at curbing executive compensation.

ABSTRACT Many studies use GAAP effective tax rates (ETRs) as a proxy for tax avoidance and assume that very low (high) ETRs represent the greatest (least) tax avoidance, yet ETRs can be affected by items unrelated to tax avoidance. Despite awareness of the potential limitations of ETRs versus other factors as a measure of tax avoidance, the literature lacks consistent evidence on the extent to which ETRs capture tax avoidance. We take a step toward filling this void using income tax footnote disclosures from 2008 through 2016 to investigate how well ETRs versus other factors capture cross‐sectional differences in tax avoidance. We document that ETRs below 5% and above 40% are significantly influenced by items largely unrelated to tax avoidance, such as valuation allowances and goodwill impairments. Truncating ETRs at zero and one, controlling for standard determinants of tax avoidance, and using industry‐size‐adjusted ETRs or multiyear GAAP ETRs do not eliminate the clustering of factors largely unrelated to tax avoidance in the tails of the ETR distribution. Cash ETRs attenuate but do not eliminate this clustering. Researchers can use ETR rate reconciliation data to construct an adjusted ETR that removes the influence of factors largely unrelated to tax avoidance. Our findings inform researchers about factors largely unrelated to tax avoidance that drive significant deviations in ETRs from the statutory tax rate. This is of increasing importance as the number of studies examining the consequences of very high and very low ETRs grows.

ABSTRACT We propose that auditor-provided tax services (tax NAS) improve internal control quality by accelerating audit firm awareness of transactions material to the financial statements. Using data from 2004 to 2012, we find robust evidence that companies purchasing tax NAS are significantly less likely to disclose a material weakness and that this result is not due to auditor independence impairment. A one-standard-deviation increase in tax NAS is associated with approximately a 13 percent decrease in the rate of material weaknesses relative to the base rate. These results are robust to tests addressing endogeneity concerns. Additional cross-sectional analyses reveal expected increased effects of tax NAS on internal control quality (1) after significant operational changes that require changes to the internal control structure, and (2) earlier in the relationship with the financial statement audit firm, when there are fewer established lines of communication between the audit team and client. This paper contributes to the knowledge spillover literature by identifying a mechanism through which tax NAS improve overall financial reporting quality.

ABSTRACT Managers express growing concern over media coverage of corporate taxes, yet no large-sample empirical study examines this phenomenon. As a first step to fill this void, we identify factors associated with the likelihood and negative tone of media tax coverage and examine firms' tax avoidance behavior following media tax coverage. We find the likelihood of media tax coverage is greater for firms with GAAP effective tax rates below the top U.S. statutory rate of 35 percent and for firms with greater visibility. The degree of negative tone is increasing in cash tax avoidance and firm size. We also find evidence of more frequent and more negative tax coverage during economic recessions. We find no evidence that firms reduce their tax avoidance following media coverage. Although our analyses are subject to limitations, our results suggest the media may not have the same influence over corporate tax policy as other external stakeholders. JEL Classifications: H25; H26; H20; M41; G39. Data Availability: Data are available from public sources identified in the paper.

ABSTRACT We use data envelopment analysis (DEA) to develop a measure of effective tax planning that is theoretically aligned with the Scholes-Wolfson paradigm and captures how efficiently firms maximize after-tax returns given their operating, investing, and financing decisions. We then (1) document that the measure is associated with higher after-tax returns to provide assurance DEA achieves its objective in our setting, (2) demonstrate that the measure is incremental to cash ETRs in predicting after-tax returns, (3) validate the measure by showing its association with lower tax and non-tax costs, and (4) provide evidence that the measure captures something about taxes distinct from overall firm performance. This measure is useful to researchers given the known limitations of ETRs as a measure of tax planning. Data Availability: Tax Effectiveness values are available on the authors' websites.

ABSTRACT Our study examines how the uniform rules of FIN 48, which governs accounting for income tax uncertainty, affect the relevance of income tax accounting. By requiring all firms to follow the same recognition and measurement process, the FASB intended FIN 48 to improve the relevance of income tax accounting. However, practitioners argue that reserves reported under FIN 48 lack relevance because they represent liabilities that will never be paid to tax authorities. Consistent with these concerns, we estimate that over a three-year period, only 24 cents of every dollar of reserves unwind via settlements. Moreover, contrary to the FASB's intention, we find no evidence that FIN 48 increased the ability of tax expense to predict future tax cash flows. Rather, we find that the predictive ability of tax expense for future tax cash flows decreases among firms for which FIN 48 is most restrictive. Finally, we find no evidence that investors identify firms for which reserves overstate future tax cash outflows and incorporate this into their valuations. Our results provide evidence that the uniform accounting rules of FIN 48 negatively affect the relevance of income tax accounting. JEL Classifications: H25; M41; M48.