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 We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7.8 billion to $15.3 billion decrease in equity foreign portfolio investment to the United States from tax‐haven countries after FATCA implementation, consistent with a decrease in “round‐tripping” investments attributable to U.S. investors’ offshore tax evasion. When testing total worldwide investment out of financial accounts in tax havens post‐FATCA, we find an average decline of $56.6 billion to $78.0 billion. We next provide evidence of other important consequences of this regulation, including increased expatriations of U.S. citizens and greater investment in alternative assets not subject to FATCA reporting, such as residential real estate and artwork. Our study contributes to both the academic literature and policy analysis on regulation, tax evasion, and crime.

ABSTRACT We investigate how R&D contributes to rising foreign profitability in U.S. multinational corporations through wage and tax incentives. Our results suggest that wage savings increase foreign profit margins derived from foreign R&D, while tax incentives increase foreign profit margins derived from domestic R&D. By exploring their relative importance, we find that wage savings are more important than tax incentives in explaining foreign profit margins when the wage discount substantially exceeds tax incentives, and vice versa. Cross-sectional tests show that firms respond more to foreign R&D wage savings when they have access to local human talent, but less as the cost of conducting foreign R&D increases. Firms respond less to tax incentives to shift income derived from domestic R&D as transfer pricing risk increases. Our evidence sheds light on the importance of R&D-related income shifting that potentially separates the location of economic activity from the location of income. JEL Classifications: H25; H26.