Perspectives on Corporate Tax Planning: Observations from the Past Decade

Jaron H. Wilde
Tippie College of Business
University of Iowa

Ryan J. Wilson
Lundquist College of Business
University of Oregon

November 2017

Abstract: Interest in corporate tax planning has accelerated in recent years as a combination of political,
economic, and technological factors have fueled the public’s awareness of corporate tax activities.
Academic research on corporate tax planning has grown in step with this public interest. This paper provides
a survey of that literature, with a focus on developments over the last decade. In the survey, we highlight
key contributions, provide a framework for links among studies, and reference some areas where our
understanding is still limited.

Keywords: tax avoidance; tax planning; tax aggressiveness; tax sheltering; income shifting

We appreciate helpful comments from Ken Klassen (editor), an anonymous referee, Dane Christensen, Mike Donohoe,
Katharine Drake, Alex Edwards, Cristi Gleason, David Guenther, Jeff Hoopes, Sean McGuire, Tom Omer, Sonja
Rego, Casey Schwab, Terry Shevlin, David Volant, and Connie Weaver. This paper draws on presentations the authors
made at the 2017 Journal of the American Taxation Association Conference and ATA doctoral consortium. We thank
Scott Summers and David Wood for providing data on tax publications as used in the BYU Accounting Rankings. We
thank Raquel Alexander, James Chyz, Diana Falsetta, Danielle Green, Pete Lisowsky, LeAnn Luna, and Jake
Thornock for help in identifying doctoral consortium participants over the last several years.

Electronic copy available at: https://ssrn.com/abstract=2964053

 Perspectives on Corporate Tax Planning: Observations from the Past Decade

1. Introduction
Interest in corporate tax planning has accelerated in recent years as a combination of

political, economic, and technological factors have fueled the public’s focus on corporate

decisions, including corporate tax behavior. Policymakers worldwide have orchestrated

coordinated actions (e.g., OECD 2017) designed to curb multinational firms’ significant tax

benefits from international tax planning (e.g., Klassen and Laplante 2012; Blouin, Krull, and

Robinson 2012; Markle 2015). Tax authorities have pushed for greater disclosure of firms’ tax

activities, ranging from uncertain tax position disclosures in the U.S. (Towery 2017) to country-

by-country reporting standards (Treasury Reg. §1.6038). Developments in financial accounting

standards have shaped trade-offs between financial reporting and tax incentives (e.g., De Simone

2016; Blouin, Gleason, Mills, Sikes 2010) and public outcry against corporate tax planning from

activist groups (Dyreng, Hoopes, and Wilde 2016) and the media have placed a spotlight on

corporate tax decisions generally.

Academic research on corporate tax planning has grown in step with the public interest,

benefiting from new data sources, developments in tax planning measures, and improved

econometric techniques.1 This survey of that literature highlights some of the key contributions,

provides a framework for links among studies and references some areas where our understanding

is still limited. The surge in the number of tax avoidance studies over the past decade

notwithstanding, we note that the study of corporate tax planning in accounting and finance is not

new, but extends earlier studies investigating tax and non-tax cost trade-offs in the traditional

1
Donohoe, McGill, and Outslay (2014) outline the progression of corporate tax planning activities from a compliance-
focused task to a profit-generating activity to an area of risk-management. They highlight changes in tax practice over
time, which likely contribute to secular changes in corporate tax avoidance.

Electronic copy available at: https://ssrn.com/abstract=2964053

Scholes-Wolfson framework (SW 1992). Indeed, much of the corporate tax avoidance literature

in the past decade builds on this work and can be viewed in the broader context of work examining

firms’ tax planning decisions.

To organize our discussion, we propose a straightforward framework that draws from

conventional economic models that frame decisions as an outcome of expected costs and benefits

(Becker 1968; Allingham and Sandmo 1972). In theory, if the expected benefits exceed the

expected costs of a given tax planning activity, firms should adopt it. However, often the nature of

expected costs related to tax planning are not well defined and researchers typically study specific

components of such costs in isolation. We advocate an agency-based view of corporate decision

making and argue that given some set of expected benefits, variation in corporate tax planning

should be a function of three costs. These costs include: (1) the misalignment of incentives between

the principal (shareholders) and the agent (executives) (agency costs); (2) determinants of

corporate tax planning related to the frictions and constraints associated with implementing tax

planning strategies (implementation costs); and (3) the expected outcome costs associated with

engaging in a particular tax strategy (outcome costs). Figure 1 provides a graphical depiction of

these relationships. Our discussion throughout the paper draws upon this organizational structure

to highlight progress the literature has made over the past decade and to draw connections among

studies.

In their excellent review of the tax accounting literature, Shackelford and Shevlin (2001)

note that before the mid-1980s, general interest accounting journals included few tax papers. Up

to the mid-1980s, legal studies and policy analysis dominated tax research. The Scholes-Wolfson

(SW) framework initiated in the late 1980s emphasizes the importance of considering all parties,

all taxes, and all costs in evaluating tax management decisions. The development of this

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framework led to a significant increase in positive tax accounting research in the 1990s that largely

explores trade-offs between tax and non-tax costs across a variety of settings. In their literature

review, Shackelford and Shevlin (2001) summarize the takeaways from this line of research and

call for more analysis of the determinants of tax aggressiveness.

Much of the initial work that followed the Shackelford and Shevlin survey focused on

defining and measuring different forms of tax avoidance. Hanlon (2003) and McGill and Outslay

(2004) outline the difficulty of attempting to estimate either taxable income or taxes paid from

financial statement information. Because firms disclose little information about their tax planning

strategies, other papers began to look for clues or footprints in the financial statements for evidence

of firms’ tax structures. Some of those papers developed measures designed to identify very

aggressive or legally questionable tax shelter activity (e.g. Wilson 2009; Lisowsky 2010; and

Brown 2011). Other papers focused on developing measures of aggressive tax avoidance using

book-tax differences. Desai and Dharmapala (2006, 2009) develop a measure of abnormal book-

tax differences designed to proxy for tax sheltering. Frank, Lynch, and Rego (2009) develop a

measure of discretionary permanent book-tax differences designed to detect intentional tax

avoidance. In the post-FIN 48 (ASC 740) era, researchers also began using uncertain tax benefits

(or models to predict uncertain tax benefits, e.g., Rego and Wilson 2012) as a proxy for tax

planning. Subsequent studies use these measures in their efforts to identify tax sheltering activity

or other aggressive forms of tax avoidance. In their excellent tax survey, Hanlon and Heitzman

(2010) provide a valuable summary of this work and an extended discussion of the various

measures of tax avoidance.2

2
Our discussion above is not a comprehensive review of the work on tax avoidance measures. For example, we do
not discuss other impactful work using marginal tax rate measures and measures based on unrecognized tax benefits.
We also note that work in this area is ongoing with some recent studies developing new measures focused on income
shifting (e.g., Dyreng and Markle 2016).

4
 One notable study in this research stream is Dyreng, Hanlon, and Maydew (2008). They

develop the long-run cash effective tax rate measure of tax avoidance. This measure is attractive

compared with the traditional GAAP effective tax rate disclosed in a firm’s financial statements

because tax accruals do not influence it. Perhaps of equal importance, the cash effective tax rate is

designed to reflect all forms of tax avoidance. That is, the measure reflects both legal tax planning

and more aggressive or questionable tax strategies. Furthermore, the metric incorporates both

permanent and temporary tax savings. This broad approach to measuring tax avoidance is

appealing to researchers interested in documenting variation in income tax burdens without having

to focus solely on a limited set of very aggressive (or legally questionable) tax shelter transactions.

Dyreng et al. (2008) documented significant unexplained variation in their long-run cash effective

tax rate measure across firms and industries. Their work touched off a surge in research over the

next decade focusing on identifying determinants of cross-sectional variation in broad measures

of tax avoidance. At the beginning of this line of research, knowledge of the determinants of tax

avoidance was largely incomplete. After the last decade of research, however, that knowledge has

expanded considerably, although as we will discuss, important gaps remain. Along these lines, we

highlight trends in tax papers published in the top accounting journals over the past decade to

provide context for these gaps. Importantly, we note the recent rapid change in firms’ political and

information environments may also be changing the determinants and consequences of tax

planning activities.

In the sections that follow we draw on our framework to discuss the corporate tax planning

literature as a function of expected costs and benefits. To keep the survey tractable, we limit our

discussion to published (or forthcoming) papers and focus primarily on corporate tax avoidance

studies published in the past decade. We also use the framework to identify areas in the literature

5
where our understanding is limited either due to a paucity of consistent evidence or a scarcity of

unifying theory.3 That said, our observations regarding potential areas for future research reflect

our personal perceptions and opinions.

2. Survey of Corporate Tax Planning Determinants

2.1 Scope of this Survey

To make this survey both concise and useful for readers, we impose a set of somewhat

artificial parameters on our discussion. Specifically, we focus only on tax avoidance research and

give little attention to other important areas in tax where accounting researchers have made

significant contributions, such as the informational role of tax expense for financial accounting,

questions related to taxes and asset pricing, and the role of tax in decisions in organizational form

and capital structure decisions. That said, we acknowledge that many of these topics (particularly

the latter two) are integral to firms’ tax planning strategies.

We also limit our discussion primarily to papers published in the most recent decade,

consistent with the surge in tax avoidance research. Despite our focus on this period, we note that

researchers should consider many important papers before this period when evaluating where

opportunities exist for future research. In fact, the tax and non-tax tradeoff literature is directly

applicable to tax avoidance research. For example, Scholes, Wilson, and Wolfson (1990) provide

evidence that banks trade-off tax and financial reporting considerations when making decisions

about selling securities, providing insights about the observed tax avoidance at those firms. In a

more general context, Mills (1998) shows proposed IRS audit adjustments are positively associated

3
We note this is not the first survey of the tax avoidance literature. See Lietz (2013) for an earlier survey of tax
avoidance research. Although Lietz (2013) is a working paper, we reference it here given its direct relevance as a
related survey paper.

6
with book-tax differences, and concludes firms face a tradeoff between book and tax incentives to

manage earnings. Other studies like Zimmerman (1983), who examines the relation between

political costs and tax avoidance; Rego (2003), who examines the role of economies of scale for

tax planning; and, early research examining determinants of effective tax rates (Gupta and

Newberry 1997; Stickney and McGee 1982) fit directly into the tax avoidance literature. More

generally, we view tax avoidance research as a part of a broader set of research providing insight

into firms’ tax planning decisions, which should be a function of expected costs and benefits.

2.2 Developments in Tax Planning Measures

Consistent with earlier calls for researchers to investigate corporate tax avoidance

determinants (Shackelford and Shevlin 2001), Dyreng et al. (2008) highlight significant persistent

cross-sectional variation in corporate tax avoidance as measured via long-run cash effective tax

rates. Similar to developments in using alternative forms of (abnormal) accruals measures as

proxies for discretion in accounting, the introduction of new tax avoidance measures led to

questions regarding the circumstances for which a particular proxy might be best suited. Hanlon

and Heitzman (2010) provide a useful summary of multiple tax avoidance proxies and outline the

strengths and drawbacks of the measures for different research contexts. Underlying the features

of these measures is Hanlon and Heitzman’s reference to tax avoidance representing a continuum,

with innocuous tax planning activities filling one end of the continuum and extremely aggressive

(e.g., evasion) activities extending to the other.

As the literature has progressed, papers are increasingly careful to discuss the form of

corporate tax planning the researchers have in mind and why the proxy used in the study is suitable

for the particular research question and setting. In general, researchers make distinctions in the

7
type of activities firms use to reduce their tax burdens and have used the term “tax avoidance” for

activities reducing explicit taxes (e.g., Dyreng et al. 2008) and “tax aggressiveness,” “tax

sheltering” or similar terms for subsets of intentional tax reductions that are on the more aggressive

end of the tax avoidance continuum (Hanlon and Heitzman 2010). However, the literature lacks

universal definition regarding the point at which a particular transaction or tax planning technique

becomes “aggressive.” Indeed, there is often uncertainty at the transaction level regarding how

“aggressive” or “risky” a particular transaction might be perceived. Thus, it is very difficult to

clearly delineate the extent of aggressive activities in a firm’s corporate tax planning.

Given the lack of a unifying theory and the implicit assumption in most of the literature

that efforts to reduce corporate tax burdens are deliberate, we argue that “tax planning” is a more

suitable term for many of the settings of interest in the literature. The term “tax planning” reflects

the notion of intentional efforts made to reduce corporate tax burdens, or investments in tax

avoidance, whereas (subsets of) tax avoidance itself reflects the outcome of that investment. Thus,

using terms such as “tax planning” may map more directly into the constructs of interest in many

studies, whereas “tax avoidance” may reflect the observed outcomes of such planning. The term

“tax planning” also avoids potentially adverse connotations that non-academics (e.g., tax directors,

journalists, regulators, and policymakers) sometimes perceive from the term “avoidance”.

However, in some settings the term tax avoidance may be appropriate, especially when one is

discussing the outcome of tax planning activities. Regardless of the term used, we advocate for a

careful discussion of the construct being studied (i.e., activities to reduce tax burdens versus the

effects of those activities).

The differences in the phrases notwithstanding, the particular language one employs does

not solve concerns about distinctions between tax planning generally and “aggressive” tax

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planning. As the literature matures, the attributes of various constructs of corporate tax planning

(e.g., planning generally, aggressive actions, evasion, and tax risk) become increasingly important

in helping researchers identify gaps in the literature.

Recent studies examining the characteristics of tax planning metrics are helpful in

distinguishing the forms of tax planning various metrics are likely to capture. For example,

Lisowsky, Robinson, and Schmidt (2013) use IRS tax return information to provide important

insights on the links between various tax planning proxies and extreme tax planning activities (e.g.,

reportable transactions). Researchers also continue to refine the measurement of specific forms of

corporate tax planning, such as income shifting (e.g., Dyreng and Markle 2016; Klassen and

Laplante 2012). Future work that refines and helps better define the construct of interest behind

tax planning metrics can contribute significantly to the literature. For instance, what constitutes

tax risk? Is tax risk merely the risk of detection by the tax authority? Or, does it include other risks

such as reputational and political risks? Further, what outcomes would one expect as a result of

risky tax planning? Should risky tax planning lead to more settlements, larger tax reserves, more

tax rate volatility, or just very rare, but large tax assessments?

3. Conceptual Framework of Determinants of Corporate Tax Planning Activities

Most work investigating corporate tax decisions begins with theory related to individual

tax compliance. Allingham and Sandmo (1972) were the first to develop a deterrence model of an

individual’s decision to evade taxes based on Becker’s (1968) model of the economics of crime.

In their model, an individual’s tax evasion decision comes down to the probability of being caught,

the size of the penalty for evasion, and the level of individual risk aversion. However, at the

corporate level, understanding tax planning decisions is complicated by agency issues. Hanlon and

9
Heitzman (2010) note risk neutral shareholders want managers to focus on profit maximization,

including efficient tax planning, but risk averse managers may take actions that reflect their own

interests. As a result, agency issues represent an important potential determinant of variation in tax

planning decisions across firms.

Chen and Chu (2005) examine corporate tax avoidance in a principal-agent framework

where a risk neutral owner hires a risk-averse manager. They conclude the manager must be

compensated through the wage contract ex ante. More specifically, the contract must reward the

manager’s tax evasion efforts and compensate them for the risk of evasion. While Chen and Chu

(2005) focus on tax evasion (illegal tax avoidance), and most tax avoidance research focuses on

more general tax planning efforts, their work illustrates the importance of providing proper

controls and incentives to minimize agency costs. Consistent with this discussion, our first

category of determinants of tax planning stems from the (mis-)alignment between ownership and

management (agency costs).

Clearly, the alignment between the interests of ownership and management has important

implications for all operating and financing decisions. We argue that efficient tax planning is an

important factor in these decisions. The past decade of tax accounting research has seen a wave of

papers focused on this link and its implications for tax planning activities. We identify a number

of important sub-categories of research within this broader category of agency costs and corporate

tax planning. These include studies examining the relation between tax planning and ownership

structures (Section 3.1.1.), compensation arrangements (Section 3.1.2.), corporate governance

(Section 3.1.3.), and individual executive characteristics (Section 3.1.4.). Although the studies in

this broad category relate to variation in tax planning related to the principal-agent conflict, some

10
of these studies examine settings where those agency costs are especially pronounced (e.g. dual

class stock) while others examine settings where they are mitigated (e.g. strong governance).

The second category in our framework deals with work on variation in tax planning

stemming from frictions related to the costs of implementing tax planning strategies

(implementation costs). Consistent with Hanlon and Heitzman (2010), we note that absent agency

considerations, properly-incentivized managers should implement tax-efficient corporate tax

decisions, where the activity’s marginal benefits exceed its marginal costs. In this context, we refer

to the front-end costs of executing and then maintaining the tax planning decision as

implementation costs. As such, research falling into this category includes work examining the

relation between tax avoidance and a host of firm characteristics (Section 3.2.1) that influence the

costs and benefits of tax planning activities. Such characteristics include the firm’s size, industry,

pre-tax profitability, financing constraints, business strategy, and extent of global operations, all

of which provide both opportunities and limitations for firms to reduce their tax burden. We also

include in this category studies examining how different operating environments influence tax

planning opportunities and activities (Section 3.2.2.). However, we should emphasize that

implementation costs are constantly changing as firm characteristics and business practices evolve,

as global opportunities and competition expand, and as regulation and tax laws change in various

jurisdictions.

The final cost category in our framework focuses on studies examining the determinants

of tax planning related to the ex post expected outcome costs of tax planning strategies. This

category includes research investigating how regulatory monitoring (Section 3.3.1.), regulation

(Section 3.3.2), and external and internal monitors (Section 3.3.3.) shape firms’ tax planning

decisions. It also includes work on how expected costs arising from external perceptions of tax

11
planning activities, such as political and market costs (Section 3.3.4.) and reputational costs

(Section 3.3.5.), influence tax planning choices. We argue that agency and expected outcome costs,

coupled with the upfront costs or frictions associated with implementing particular tax strategies

(implementation costs), should shape managers decisions about what tax strategies to pursue. To

summarize, we argue that holding constant expected benefits, three categories of expected costs –

(1) agency costs, (2) implementation costs, and (3) the ex post expected outcome costs – should

explain variation in tax planning strategies across firms.

3.1. Agency Costs and Corporate Tax Planning

3.1.1. Ownership Structure and Corporate Tax Planning

From a broad agency view of corporate tax planning, governance, ownership structure,

executive characteristics, and compensation incentives all interact to encourage (discourage) the

manager to make (from making) optimal tax planning decisions. Much of the initial research on

the association between agency costs and tax avoidance has focused on ownership structure. In

this stream of work, research highlights the effect of ownership structure incentives on corporate

tax behavior and provides evidence of associations between family firm membership (Chen, Chen,

Cheng, Shevlin 2010), dual-class ownership structure (McGuire, Wang, Wilson 2014), and private

versus public-firm ownership (Mills and Newberry 2001; Badertscher, Katz, and Rego 2013) and

tax outcomes. Interestingly, each of these papers offers different explanations for the nature of the

agency issues underlying the association between tax planning activities and ownership structure.

For example, Badertscher et al. (2013) predict and find that management-owned firms engage in

less tax avoidance than private-equity-backed firms because manager-owned firms have more risk-

averse managers. In contrast, Chen et al. (2010) argue that their finding that family-owned firms

12
engage in less tax avoidance than non-family-owned firms suggests family-owned firm manager

concerns over potential price discounting by outside investors when they associate tax avoidance

with managerial opportunism. These differing explanations raise the question of whether there are

agency issue commonalities across these settings or whether, consistent with the different

explanations, each setting has unique agency issues.

3.1.2. Managerial (Compensation) Incentives and Corporate Tax Planning

Managerial incentives and governance structure can also mitigate or exacerbate agency

conflicts between owners and managers. A number of recent studies extend our understanding of

the role of managerial incentive and governance structures in leading to particular tax outcomes.

For example, Robinson, Sikes, and Weaver (2010) provide evidence consistent with the structure

of tax departments as profit centers—versus cost centers—being associated with tax outcomes

(e.g., GAAP ETRs). Rego and Wilson (2012) find that managerial equity incentives induce

managers to engage in relatively more aggressive tax planning. Similarly, Armstrong, Blouin, and

Larcker (2012) find a negative association between tax director compensation incentives and

GAAP ETRs, but they find little evidence of an association with other tax attributes. In addition,

Phillips (2003) and Gaertner (2014) find that after-tax compensation incentives are associated with

corporate tax behavior for business unit managers and CEOs, respectively. Powers, Robinson, and

Stomberg (2016) find that when CEO performance bonuses are based on cash flow metrics, firms

report lower GAAP and cash effective tax rates than when those bonuses are based on earnings

metrics. Moreover, Chi, Huang, and Sanchez (2017) examine compensation incentives that

dampen risk-appetite, i.e., inside debt, and provide evidence of a negative association between

inside debt holdings and corporate tax sheltering.

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3.1.3. Corporate Governance and Corporate Tax Planning

Recent work also highlights the role of governance in inducing optimal levels of corporate

tax planning, with well-governed firms constraining extremely high (presumably over-investment

in) but curbing extremely low (presumably under-investment in) corporate tax planning

(Armstrong, Blouin, Jagolinzer, and Larcker 2015; Bird and Karolyi 2017). These studies highlight

that effective governance likely induces tax planning towards an optimum, and shed light on earlier

work that suggests that tax planning benefits accrue to investors when a firm is well governed

(Wilson 2009). Cook, Moser, and Omer (2017) support the notion of an optimal investment in tax

planning by providing evidence that firms’ cost of equity capital is higher with tax avoidance that

is below or above investors’ expectations. They also examine whether firms that alter their future

tax planning exhibit a reduction of their ex ante cost of equity capital and find that tax planning

decreases (increases) from the prior year for firms that were above (below) investors’ expectations

in the prior year. Like the ownership structure papers, the focus of these studies revolves around

set structural incentive and/or governance attributes, where managers are effectively treated as

substitutable within a given set of firm attributes, incentive structures, and governance

mechanisms.

3.1.4. Executive Characteristics and Corporate Tax Planning

In concert with developments in our understanding of how firm ownership, incentive, and

governance structures influence corporate tax planning, research in the past decade has also

considered tax planning from a manager-centric, versus a firm-centric, perspective. Although it is

often difficult to distinguish between corporate outcomes related to firm attributes and those

arising from decisions of managers who run them, the distinction is important to a variety of

stakeholders (e.g., directors, regulators) who have an interest in motivating particular forms of

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corporate tax behavior. Consistent with observations that managers, rather than corporations, make

decisions within the firm, new research emerged drawing on insights from economics (e.g.,

Bertrand and Schoar 2003) and questioned whether managers exhibit unique traits that

differentiate corporate tax behavior in the firms they manage.

This approach was a deviation from much of the firm-centric literature that implicitly

assumes managers are substitutable within some set of firm attributes, incentive structures, and

governance mechanisms. Dyreng, Hanlon, Maydew (2010) examine whether individual managers

have significant effects on the corporate tax behavior of the firms they manage. They find evidence

of significant managerial fixed effects (using the GAAP ETR), but find little evidence of

associations between broad executive styles or biographical characteristics and corporate tax

planning. Dyreng et al. (2010) highlight that one challenge with this research is balancing the

desire to retain variation in firm attributes that managers may use to reduce tax burdens, while

sufficiently controlling for firm-level attributes in ways that allow one to attribute results to

specific managers, rather than to firm characteristics. Their study raised important questions about

what such managers look like—i.e., what are the managerial traits of executives that promote

corporate tax planning versus those who do not?

Subsequent work has built on the notion that managers play significant individual roles in

firms’ corporate tax behavior and has investigated different managerial characteristics. As a rule,

the general approach with these studies is to use regression models to hold firm attributes constant

and then focus on a specific managerial trait. The evidence from this line of research points to

associations between a number of individual managerial traits and corporate tax outcomes

including: military background (Law and Mills 2017), narcissism (Olsen and Steckelberg 2016),

political orientation (Christensen, Dhaliwal, Boivie, Graffin 2015), personal aggressiveness (Chyz

15
2013), gender (female CFOs, Francis, Hasan, Wu, Yan 2014), religious norms in the community

(Dyreng, Mayew, and Williams 2012; Boone, Khurana, and Raman 2013), and managerial ability

(Koester, Shevlin, and Wangerin 2017).

3.2. Implementation Costs and Corporate Tax Planning

Much of the early work in corporate tax planning focused on the link between observable

firm attributes and corporate tax outcomes. These studies identify costs and frictions associated

with implementing tax avoidance strategies. We organize these factors into two broad categories:

(1) firm attributes and (2) firms’ operating environments. Importantly, we propose these categories

to simplify organization and acknowledge that many studies might belong to more than one group

and that the distinctions between categories are not always perfect. Indeed, consistent with

conclusions in Coase (1937), who defines the firm itself as a network of contracts, we note the

difficulty of separating the attributes of the firm from the firm’s operating environment and the

stakeholders that contract with the firm.

3.2.1. Firm attributes and Corporate Tax Planning

Prior research examines numerous firm attributes and their association with corporate tax

outcomes, including firm size (Zimmerman 1983), planning costs (Mills, Erickson and Maydew

1998), and international operations (Rego 2003). Of course, firm attributes in tax and other

contexts are not independent and often reflect endogenous associations related to firm choices,

business models, and operating environments. Along these lines, more recent work studies a

number of firm attributes linked to corporate tax behavior, including the firm’s information

environment (Gallemore and Labro 2015), internal control mechanisms (Bauer 2016; De Simone,

Ege, and Stomberg 2015), business strategy (Higgins, Omer, and Phillips 2015), financial

16
constraints (Edwards, Schwab, and Shevlin 2016; Law and Mills 2015; Dyreng and Markle 2016),

and use of tax havens (Dyreng and Lindsay 2009; Dyreng, Lindsay, Markle, Shackelford 2015).

Some of these studies examine firm characteristics that facilitate tax planning (e.g., tax havens and

the information environment) whereas others focus on characteristics associated with incentives

to engage in tax planning (e.g., financial constraints).

3.2.2. Operating environment and Corporate Tax Planning

Closely related to the research on firm attributes, another line of research examines how

firms’ operating environments facilitate their tax planning. Aspects of the operating environment

examined range from home country tax system characteristics (Atwood, Drake, Myers, and Myers

2012) to accounting standards (De Simone 2016) to product market competition (Kubick, Lynch,

Mayberry, Omer 2015) to the firm’s internal information environment (Gallemore and Labro

2015). As increasing global competition, technological developments, changes to regulation, and

dynamic political developments continue to shape the environment in which firms operate, there

are likely to be opportunities to understand the role such conditions play in influencing corporate

tax decisions. Such changes often introduce uncertainty regarding how changes in the economic

or political environment will impact firms’ decisions. With instances of ex post regulatory changes

affecting ex ante negotiated state aid (e.g., Apple, Ireland, and the European Commission;

European Commission 2017), one especially relevant area of interest may be the effect of tax

policy uncertainty on firms’ investment and financing decisions.

The backdrop for much of the tax planning literature encompasses financial reporting

considerations. For example, prior research offers evidence consistent with a positive association

between capital market incentives and tax sheltering (e.g., Wilson 2009; Lisowsky 2010; McGuire,

Omer, Wilde 2014). However, the corporate tax decisions often involve financial reporting

17
tradeoffs and research in this area complements earlier work examining tradeoffs between tax,

capital, and financial reporting incentives (e.g., Beatty, Chamberlain, and Magliolo 1995; Beatty

and Harris 1999; Petroni and Shackelford 1995; Hodder, McAnally, and Weaver 2003). With ever-

present capital market pressures and a dynamic financial reporting environment, this area is likely

to be a promising area for future research.

3.3. Outcome Costs and Corporate Tax Planning

3.3.1. Regulators and Corporate Tax Planning

The final category of our determinants of corporate tax planning framework is outcome

costs. We begin our discussion of this line of research with work that considers the role of

regulators in curbing corporate tax planning activities. Here, the focus has included both theoretical

(e.g., De Simone, Sansing, and Seidman 2013) and empirical (e.g., Beck and Lisowsky 2014) work

on compliance programs as well as on compliance practices (e.g., in transfer pricing, Klassen,

Lisowsky, and Mescall 2016b). Moreover, research investigates the role tax authorities (e.g.,

Hoopes, Mescall, Pittman 2012), distance to the tax authority (Kubick, Lockhart, Mills, Robinson

2017), and financial regulators (e.g., SEC monitoring, Kubick, Lynch, Mayberry, Omer 2016) play

in influencing corporate tax planning.

3.3.2. Regulation and Corporate Tax Planning

The evidence suggests that changes in regulation and the information conveyed to tax

authorities are also associated with firms’ tax planning behavior. For example, Donohoe and

McGill (2011) find that the introduction of Schedule M-3 filing requirements are associated with

reduced discretionary book-tax differences. Towery (2017) finds the implementation of IRS

Schedule UTP results in firms reporting lower reserves for uncertain tax positions, but does not

18
result in firms claiming fewer tax benefits. Future changes in disclosure regulation (e.g., country-

by-country reporting) and tax authority enforcement activities are likely to raise new questions

regarding firms’ corporate tax activities. For example, the IRS recently announced a shift in the

examination process to focusing on areas of risk rather than full return review. The 2013 IRSAC

Large Business & International Report notes “by risk assessing taxpayers in advance of

examination, many taxpayers would require a much more limited inquiry or review by the IRS.

The examination process could become more focused both as to taxpayer selection and the extent

of IRS review” (IRSAC 2013). This shift in the examination process has potentially interesting

implications for firms’ propensities to engage in certain corporate tax planning activities.

3.3.3. External and Internal Monitors and facilitators of Corporate Tax Planning

Prior work provides evidence advisors play a potentially important role in reducing tax

burdens. For example, internal tax departments and external advisors (in some settings) are

associated with greater corporate tax planning (Klassen, Lisowsky, and Mescall 2016a). In

addition, evidence suggests the presence of large returns to lobbying and political campaign efforts

in terms of future tax savings (e.g., Gupta and Swenson 2003; Brown, Drake, and Wellman 2015).

Prior work also highlights disparities in monitoring incentives provided by key corporate

stakeholders and corporate tax outcomes. For example, evidence suggests that some monitors,

such as directors (Brown 2011; Brown and Drake 2014), industry-expert auditors (McGuire, Omer,

and Wang 2012), hedge-fund activists (Cheng, Huang, Li, Stanfield 2012), and institutional

investors (Khan, Srinivasan, and Tan 2017) facilitate or encourage corporate tax planning in

certain settings. Thus, for some firms, monitors who may constrain other forms of aggressive

planning (e.g., financial misreporting) may be the very parties that facilitate tax planning. Other

studies highlight the role monitors play in deterring corporate tax planning in different contexts

19
such as with labor unions (Chyz, Leung, Li, and Rui 2013), institutional investors (Khurana and

Moser 2013) and employee whistleblowers (Wilde 2017).

3.3.4. Political and Market Costs of Corporate Tax Planning

Aside from the explicit risk of detection from regulators or other external (internal) parties,

other studies investigate potential outcome related costs including market penalties (Hanlon and

Slemrod 2009) and strikes against external stakeholders’ perceptions of the firm. One such line of

research looks at the implications for corporate tax behavior associated with a commitment to

corporate social responsibility (CSR) activities (Hoi, Wu, and Zhang 2013; Davis, Guenther, Krull,

Williams 2016; Watson 2015). Here, the literature provides mixed evidence on the link between

certain forms of tax planning and CSR activities. The literature also provides evidence of links

between tax outcomes and potential political costs among federal contractors (Mills, Nutter, and

Schwab 2013), disclosure regulation (e.g., discretion in geographic earnings disclosure, Hope, Ma,

and Thomas 2013; disclosure-related political costs in the U.K., Dyreng et al. 2016), and tax

amnesties (Shevlin, Thornock, and Williams 2017). Although the role of political costs in

accounting and tax decisions has long been an area of study (e.g., Zimmerman 1983; Watts 1977),

changes in the political environment, additional data sources, new regulation, and increased firm

sensitivity to public scrutiny continue to provide unique opportunities to study how potential

political costs drive firm tax decisions in different settings.

3.3.5. Reputational Costs and Corporate Tax Planning

Recent work has also focused on the potential reputational costs linked to corporate tax

planning. Although survey papers offer compelling evidence that reputational concerns are an

important factor of corporate tax decisions (e.g., Graham, Hanlon, Shevlin, Shroff 2013), evidence

using archival settings is limited (e.g., Gallemore, Maydew, and Thornock 2014) or focused on

20
specific settings (e.g., Austin and Wilson 2017). Thus, both the nature and magnitude of

reputational costs associated with aggressive tax planning remain unclear. We also note a link

between research on the reputational costs of tax planning and research on political costs. For

example, our understanding of whether and how political and reputation costs drive decisions is

still limited. Of note are questions relating to the scope of political costs versus reputational costs

and evidence regarding which types of firms are most sensitive to the different costs. Are they

distinct and if so, what are the circumstances that determine which type of cost drives corporate

tax decisions? Furthermore, it is possible firms do suffer significant reputational costs, but they

manifest through the political process in the form of new regulations, new tax laws, or increased

enforcement. Hence, evidence on the nature and extent of reputational costs in tax planning

decisions may offer important insights on factors that influence a firm’s tax decisions.

As the corporate tax planning (determinants) literature grows in depth and breadth, our

understanding of corporate tax behavior becomes increasingly clear in some areas but is ever

changing in others. To put these observations into perspective, we now turn to a discussion of

historical publication rates of tax articles in top accounting journals and highlight some of the areas

where the literature on corporate tax planning determinants has notable gaps.

4. Observations on Potential Research Opportunities

4.1. Growth in the Number of Active Tax Researchers
In June of 2008, a consortium of accounting firms raised funds to support up to 120 new

Ph.D. students focused on audit and tax research as part of the Accounting Doctoral Scholars

(ADS) program (www.adsphd.org). This program, coupled with additional interest from non-ADS

tax-focused doctoral students, has ostensibly amplified interest in the tax research area. Evidence

of such growth is apparent in the annual reports of the Senior Editor of The Accounting Review.

21
For example, the report released in 2009 (the initial year the ADS students began their doctoral

studies) indicates there were 35 unique tax manuscript decisions for the year ending May 31, 2009,

representing 5.4 percent of all submissions (Kachelmeier 2009). In contrast, for the year ending

May 31, 2015, the annual report indicates there were 53 unique tax manuscripts decisions or 7.9

percent of all submissions (DeFond 2015). These data suggest a roughly 50 percent increase [(53

– 35)/35] raw increase in tax submissions from 2009 to 2015 and a meaningful increase in the

proportion of total tax articles submitted (from 5.4 percent to 7.9 percent of all articles).

The data also show that accepted tax articles grew in concert with the increasing number

of submissions to The Accounting Review. From June 1, 2008 – May 31, 2015, 6.8 percent of the

submissions and 6.9 percent of the acceptances had taxation as the primary subject area.4 Figure 2

also provides additional perspective on tax publication rates at the top accounting journals,

displaying the number of tax articles published per year in each of the following six journals from

2007 through 2016: Journal of Accounting & Economics, Journal of Accounting Research, The

Accounting Review, Contemporary Accounting Research, Review of Accounting Studies, and

Accounting, Organizations, and Society.5

Figure 2 reflects the reality that publishing in the top journals is difficult. The mean number

of published tax articles per year for the top accounting journals from 2007 through 2016 are as

follows: Journal of Accounting & Economics (2.5), Journal of Accounting Research (1.2), The

4
We also considered data of ATA doctoral consortium participants as a potential measure of growth in tax researchers
in accounting. Although many of the participants go on to become tax professors at different institutions, we found
actual submissions of journal articles to be a more direct measure of growth in tax research in accounting vis-à-vis
doctoral consortium participation. For example, (1) not all participants go on to pursue tax as a primary research focus,
(2) the consortium is limited in terms of the number of participants who can attend, and (3) many submitted and
published papers reflect the work of researchers who do not identify themselves as “tax” researchers.
5
We thank Scott Summers and David Wood for sharing the underlying data on the tax articles, which they collected
for the BYU Accounting Rankings (http://www.byuaccounting.net/rankings/univrank/rankings.php). The website
methodology used in these rankings is described in Coyne, Summers, Williams, and Wood (2010) and Pickerd,
Stephens, Summers, and Wood (2011).

22
Accounting Review (5.6), Contemporary Accounting Research (3.2), Review of Accounting Studies

(1.4), and Accounting, Organizations, and Society (0.9).

As the literature progresses, the contribution threshold for publication naturally rises,

consistent with the importance of extending our understanding of corporate tax behavior beyond

evidence documented in or inferred from prior work. Given the explosion in the number of tax

avoidance articles over the last several years, it can be difficult to determine whether a given tax

planning determinant meaningfully contributes to our understanding of corporate tax behavior

beyond what is documented in other studies. Below we provide a discussion of areas of research

where we observe unresolved questions that may be of interest to policymakers, regulators,

directors, investors, or researchers. We admit, however, that raising questions based on existing

findings is far easier than providing answers to those questions.

4.2. Corporate Tax Planning and Tax Risk

Consistent with the agency costs of corporate tax planning, Chen and Chu (2005) note that

managers need to be compensated for the risk associated with tax evasion. A number of papers

examining how ownership structure and compensation relate to tax planning (summarized above)

discuss the role these forces play in influencing executives’ willingness to incur the risk associated

with tax planning. However, it is not clear whether or to what extent high levels of tax planning

are indicative of high levels of tax risk. Consequently, one area where the literature would benefit

from a deeper analysis is the association between tax planning and tax risk. Fundamentally, the

notion of what tax risk encompasses has little consensus in the literature, limiting our

understanding of the underlying drivers of such risk? Does tax risk encompass tax transactions

23
only or does it also consist of spillover (e.g., political and reputational) costs of those transactions,

the financial reporting implications of the activity, or the disclosure choices related to it? Is the

risk related to the operations that give rise to tax benefits (e.g., R&D expenditures) or in the tax

treatment of a given financial arrangement? Does it refer only to activities the firm has adopted or

does it also include the choice not to pursue certain activities that could reduce the firm’s overall

tax burden?

It seems reasonable to expect that some firms exhibit lower cash effective tax rates than

their peer firms because of a willingness to accept more tax risk. In other words, the low tax rate

firms are being more aggressive in pursuing risky tax strategies to lower their rates. If this is not

the case, it is difficult to understand why all firms would not exhibit similarly low tax rates. At the

very least, one might expect that firms within the same industry, with similar tax planning

opportunities, will exhibit similar effective tax rates. However, several studies call into question

the notion that low tax rates are indicative of risky tax planning. Dyreng et al. (2008), who first

study cash effective tax rates, find that the persistence of low cash effective tax rates is higher than

the persistence of higher cash effective tax rates. This result is a bit counterintuitive if low tax rates

reflect more tax risk, as one would expect lower rates to be more volatile because of risky tax

planning. Guenther, Matsunaga, and Williams (2017) examine this association more directly and

find that low cash effective tax rates are not related to either increased tax rate volatility or higher

firm risk.

These results raise some interesting questions. If the variation in cash effective tax rates is

not related to differences in risk appetite, what other agency issues or constraints explain this

variation? Are there significant tax risks unrelated to measures of tax uncertainty or tax rate

volatility? There is much that we do not understand about how variation in corporate tax outcomes

24
occurs in the presence of a risk averse manager and a risk neutral owner, especially given evidence

that specific managerial traits incrementally influence corporate tax outcomes. In addition, how

much of the variation in tax outcomes that we observe is due to risky tax planning versus effort?

It is possible, perhaps even likely, that certain managers experience cognitive dissonance with

aggressive tax planning strategies and others are simply not interested in focusing on tax

minimization. The literature has made great strides in identifying associations between specific

determinants of tax outcomes and manager traits, but we still have a limited understanding

regarding whether and how managerial traits and corporate governance and incentive structures

converge to allow for certain forms of tax planning. More fundamentally, is corporate tax planning

really about incentives and governance structures or about personal attributes of managers drawn

to certain types of firms and who exhibit a stronger (weaker) preference for tax planning activities?

4.3. Reputational Costs of Corporate Tax Avoidance

At the center of the role outcome costs play in corporate tax planning are managers’

concerns about potential reputational harm a firm might incur from publicized tax planning

activities. Yet, the association between tax planning and reputation is another area of tax research

that has produced somewhat puzzling results. Survey evidence indicates managers consider the

reputational consequences of tax sheltering activity (e.g., Graham et al. 2013; Ernst & Young

2014). In fact, Graham et al.’s (2014) findings from corporate tax executives indicate that

reputational concerns are the second most important factor among the factors that explain why

firms choose not to adopt potential tax planning activities. However, empirical work finds little

evidence that firms or managers suffer actual reputational consequences (e.g., Gallemore et al.

2014). One challenge with empirical work investigating the reputational costs of tax planning is

25
the reliance on historical data. The political environment surrounding corporate tax activities has

changed in recent years as corporate effective tax rates have declined and regulators have worked

to limit the benefits of international tax planning. The rise of social media and the speed of

information processing have also likely changed the risks for firms of being associated with

questionable tax practices. Thus, examining the relationship between corporate tax planning and

reputational costs as new data becomes available is a potentially fruitful area for future research.

It is also possible that the association between corporate tax planning and reputational costs

varies across geographic regions as a function of social norms and beliefs about the role of

government and wealth redistribution. Moreover, the mixed results of prior work examining the

link between tax planning and corporate social responsibility (e.g., Hoi, Wu, and Zhang 2013;

Davis et al. 2016; Lanis and Richardson 2012; Watson 2015) suggest that additional work may

help us better understand the nuances of taxes in the context of broader decisions and activities

that are likely to influence public perceptions. Although current research suggests managers of

U.S. firms do not appear to treat taxes as a component of CSR (Davis et al. 2016), this dynamic

may be changing as both CSR activity and reporting and corporate tax planning garner more

attention. Here again, this association may also vary meaningfully across regions depending on

how social responsibility is defined.

4.4. Financial Reporting Decisions and Corporate Tax Planning

A question underlying much of the tax planning literature and one that lies at the

intersection of implementation costs and agency costs of tax planning activities is whether

observed tax outcomes reflect specific activities focused on reducing the firm’s tax burden or an

26
overarching approach or strategy in the firm. In other words, is aggressive tax behavior merely one

manifestation of aggressive management? Strictly-speaking, aggressive financial reporting and tax

incentives are not mutually exclusive, but the complex and potentially conflicting trade-offs in

different settings suggest a more nuanced relationship between financial reporting and tax

decisions. Indeed, some of the evidence indicates a negative association between aggressive

financial reporting and tax incentives, especially in the presence of extreme forms of financial

misreporting, where managers likely have strong incentives to deter additional scrutiny of financial

reports (e.g., Erickson, Hanlon, and Maydew 2004; Lennox, Lisowsky, and Pittman 2013). In

contrast, other research highlights a positive association between aggressive financial reporting

and tax behavior (Frank et al. 2009; Wilson 2009; Lisowsky 2010). The nature of the proxies used

in the different studies and the forms of aggressiveness at play in the different settings potentially

account for the observed differences. Frank, Lynch, Rego, and Zhao (2017) further investigate the

interaction between aggressive tax and financial reporting by examining whether the combination

of aggressive tax and financial reporting is associated with risk-taking through external asset

growth. They find risk taking is associated with aggressive reporting practices prior to the

Sarbanes-Oxley Act of 2002 (SOX), but this association is attenuated in the post-SOX period.

Future work might shed light on the settings where one might expect an association between

aggressive tax and financial reporting behavior to manifest.

Bozanic, Hoopes Thornock, and Williams (2016) investigate the links between financial

reporting disclosure and tax enforcement. They make connections between both changes in SEC

disclosure requirements and the IRS’s tax enforcement behavior and between changes in tax

disclosure requirements and firms’ disclosure choices. Given the importance of understanding the

association between tax and financial reporting incentives, research shedding light on firm

27
reporting behavior in distinct contexts may prove to be policy-relevant to regulators and

policymakers charged with monitoring aggressive corporate behavior.

4.5. How Do the Individual Tax Planning Determinants Fit Together?

As one steps back and notes the broad array of papers examining individual determinants

of corporate tax behavior and the various agency costs, implementation costs, and outcome costs

that give rise to different levels and types of corporate tax planning, it is difficult to assess how all

of the determinants fit together. In much of the literature, the field tends to examine determinants

independently, using a relatively standard set of control variables across studies, albeit sometimes

measured in different ways, and then focus on the specific determinant of interest in each study.

This tendency perhaps stems from (1) practicalities in the research, which would prevent one from

controlling for the dozens of individual determinants documented in prior work (and that may

require extensive data collection), and (2) the absence of a unifying theory that allows us to

understand the relationships among the different determinants.

However, several questions emerge from the lack of clarity regarding how the body of

documented determinants fit together. For example, are the individual determinants independent

or do they serve as separate proxies for a smaller set of underlying salient factors that drive tax

decisions? Alternatively, are corporate tax planning determinants even more nuanced and unique

than we currently account for in the literature? Under conventional regression assumptions, our

standard set of control variables satisfies some of the concerns that unobservable heterogeneity

could bias the coefficients in regression models in ways that could unduly affect inferences.

However, without a cohesive set of predictions, it is difficult to interpret how many of the

individual determinants fit into the larger picture of corporate tax behavior. We are hopeful the

28
framework provided in this study can provide a starting point for developing predictions that

consider how the various determinants fit together.

Moreover, with the surge of published papers documenting evidence of a particular firm or

manager attribute being associated with measured tax outcomes, future research will likely need

to make a stronger case for why a particular tax planning determinant meaningfully extends the

literature. Given that the explanatory power for tax planning proxies remain relatively low, papers

with compelling theoretical motivation that also demonstrate significant incremental explanatory

power (e.g., incremental F-tests, etc.) would be positioned to make such contributions.

Tax planning proxies reflect observed outcomes and one can rarely observe actual

corporate tax planning activities outside the firm. Consequently, the literature notes that corporate

tax planning metrics are likely noisy (i.e., we measure tax avoidance with error). However, the

degree to which a particular proxy is noisy hinges critically on the definition of the construct one

has in mind. For example, if the construct of interest is any activity that reduces cash taxes paid

relative to pre-tax accounting income, then one observes the construct directly in the cash ETR—

no proxy is necessary. Although the effects of measurement error are not always clear (e.g., noise

in the dependent variables should lead to attenuation bias if the measurement error is uncorrelated

with the error term, but measurement error in the independent variables of interest may yield biased

estimates), interpreting the results of models regressing noisy tax planning measures on noisy

proxies for potential determinants is difficult in the absence of clear economic predictions. Thus,

developing and testing hypotheses that clearly articulate the construct of interest (for both the form

of tax planning and the factors influencing – or being influenced by – such tax planning) becomes

critical to readers’ ability to evaluate the validity of both the arguments and the suitability of the

proxy for the construct of interest. Much of the literature to date draws on a broad construct

29
consisting of activities that reduce cash taxes paid relative to pre-tax accounting income. However,

at the core of many questions (e.g., agency issues, implementation costs, and outcome risks) is the

means by which managers implement transactions and arrangements to reduce such cash taxes

paid. Does the form of tax planning researchers have in mind in their setting include an ex ante

decision process in which managers consciously consider ways to conceal activities from the

government or anticipate opportunities to negotiate with tax authorities? Does the tax planning

construct involve exploiting legal strategies available in pertinent tax law, albeit with some

inherent uncertainty given the complexity in the transactions or ambiguity in the law? Careful

discussion of the specific constructs of interest in the given setting may help identify areas where

observed effects are most likely to manifest . Similarly, efforts to gauge the extent of unobservable

heterogeneity and the potential impact of correlated omitted variables (Christensen 2016; Call,

Martin, Sharp, Wilde 2017; Frank 2000; Larcker and Rusticus 2010; Oster 2017) in tax settings

may improve researchers’ ability to draw more reliable inferences from observed results.

4.6. Specific Tax-planning Mechanisms

Although theoretical work suggests that outcome costs should play a meaningful role in

deterring certain aggressive forms of tax planning activities, the difficulty of identifying specific

types of activities (e.g., aggressive positions that would not hold up upon challenge) is a challenge

shared by all external parties, including researchers. Prior tax sheltering studies identify instances

of specific, identifiable transaction structures that firms have used to reduce their tax burdens (e.g.,

Graham and Tucker 2006; Brown 2011; Wilson 2009; Lisowsky 2010), but samples of such firms

are small and only include transactions that are publicly disclosed. The details of most tax planning

activities are not publicly observable and tax planning outcomes (e.g., effective tax rates) may

30
include some, but not all, of the effects of such planning. Indeed, McGill and Outslay (2004)

highlight how financial statement measures may not reflect particular tax strategies, even an

egregious case such as that of Enron. As researchers increasingly turn to examining larger samples

with corporate tax planning proxies, they face a trade-off between generalizability (studying

effects in large samples of firms) and precision (identifying the mechanisms that firms use to

reduce tax burdens).

Dyreng, Hanlon, Maydew, and Thornock (2017) investigate changes in corporate tax rates

over the past 25 years, and find that these rates have declined significantly. They find that,

“contrary to conventional wisdom,” effective tax rates of both domestic and multinational firms

have experienced similar declines during their sample period. This finding raises interesting

questions about the causes of these lower effective tax rates for both domestic and multinational

firms. A balance of studies that identify specific transactions and techniques that firms employ to

generate tax savings would complement the existing and concurrent research investigating broad

effects in larger samples. Insights on the specific mechanisms firms use may be especially useful

because most studies include controls for the very tax-planning mechanisms that firms likely use

to reduce their tax burdens, such as foreign operations, leverage, and research and development.

Examples of work that provide insights into some of the mechanisms firms use to generate

tax savings include financial derivatives (Donohoe 2015a, b), tax havens (Dyreng and Lindsay

2009), loss-shifting (De Simone, Klassen, Seidman 2017), and state tax planning (Dyreng,

Lindsay, and Thornock 2013; Gupta and Mills 2002; Klassen and Shackelford 1998). Studies that

provide such insights are particularly helpful in enhancing our understanding of the mechanisms

that facilitate corporate tax planning and are potentially insightful to policymakers and regulators

aiming to curb future aggressive activities. Similarly, evidence on the nature of trade-offs between

31
deferral strategies that generate cash savings upfront and permanent differences that reduce the

effective tax rate for financial reporting purposes would further expand our understanding of the

incentives behind specific tax planning strategies.

4.7. Real Consequences of Corporate Tax Planning

At the intersection of agency costs, implementation costs, and outcome costs lies a

potentially significant set of real consequences (both benefits and costs) of corporate tax planning.

Like the determinants literature, the nature of research in this area has taken different forms. For

example, prior research documents associations between corporate tax planning (or corporate tax

incentives, e.g., “trapped cash”) and meaningful economic effects such as takeover premiums

(Chow, Klassen, and Liu 2016), foreign acquisition profitability (Edwards, Kravet, and Wilson

2016), and forced managerial turnover (e.g., Chyz and Gaertner 2017). Research also indicates

that corporate tax planning is associated with adverse capital market consequences such as stock

price crash risk (Kim, Li, and Zhang 2011) and higher bank loan spreads (Hasan, Hoi, Wu, and

Zhang 2014). These findings highlight the importance of understanding the (in)direct effects of

tax planning activities on other stakeholders.

As concurrent and future research continues to expand our understanding of consequences

of corporate tax planning, we expect that such developments may, in turn, lead to an even deeper

understanding of the determinants of corporate tax planning decisions. Indeed, rational managers

likely consider a wide-range of potential tax planning consequences when making their tax

planning decisions. We expect that as research sheds further light on determinants and

consequences of corporate tax planning, our understanding of fundamental questions about such

32
activities will become clear. For example, in what context is corporate tax avoidance good or bad—

for managers, for investors, and for other stakeholders? Numerous studies touch upon this topic at

least indirectly, but to date, the literature lacks consensus regarding how investors and other

stakeholders view tax planning activities. This lack of consensus likely reflects both the absence

of underlying theory that would lead to testable hypotheses as well as the possibility that market

perceptions are more nuanced than simple tests of averages reflect. Moreover, challenges in

interpreting market perceptions of aggressive tax activities (e.g., Hanlon and Slemrod 2009) and

uncertainty in judgments related to different tax attributes (e.g., loss carryforwards, McGuire,

Neuman, Olson, Omer 2016) suggest that further work may be helpful in extending our

understanding of whether and in what contexts investors are likely to prefer a given level of tax

planning. It is likely that factors such as governance and compensation structures also moderate

how investors and other stakeholder view tax planning activities.

4.8. A Look Forward at Policy Relevance

As we write in October 2017, the crossroads for changes in tax policy of one form or

another seem possible, if not probable. Although the prospects for fundamental tax reform are

always slim, economic pressure for change, coupled with a general consensus regarding the need

for changes in certain areas of the tax law (e.g., international taxation, the corporate tax rate),

suggest that changes may come. Such changes will likely offer potential opportunities for new

areas of study. For years, senior researchers in the field have called for accountants to bring their

unique perspectives and comparative understanding of tax incentives and financial reporting issues

and contribute to tax policy debates in more meaningful ways (e.g., Shackelford and Shevlin 2001;

Hanlon and Heitzman 2010). In this fashion, research that identifies clever ways to take insightful

33
observations from tax executives (e.g., Graham et al. 2014) to large sample settings could deepen

our understanding of economic determinants of tax planning for a large cross-section of firms.

Consistent with these earlier calls, the current environment is ripe for studies that examine

effects beyond looking at what firms do but going further by looking at the intent of a given tax

law and investigating whether it achieved its objectives. One example of this type of study is

Blouin and Krull (2009), who examine how firms responded to the incentives provided by the

American Jobs Creation Act of 2004. One example of an area that may be fruitful going forward

is investigating the effects of patent box regimes and whether they are effective at increasing R&D.

As Congress debates forms of border tax adjustments, accountants may be uniquely

qualified to shed light on financial reporting incentives for these potential changes. Moreover, with

proposed changes to forms of cost recovery, it would be helpful to have a deeper understanding of

the unique incentives that managers of different forms of business (e.g., pass-throughs versus C-

corporations) have on financial reporting and cash tax savings tradeoffs. Regardless of the path tax

reform might take, it is likely that tax researchers in accounting will be well-positioned to

contribute evidence and insights on the effects of future changes, if not comment on the challenges

proposed legislation is likely to present.

34
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 Figure 1.
Conceptual Framework of Determinants of Corporate Tax Planning

Principals
Section 3.1

Agency Costs

Managers

Section 3.2 Section 3.3

Tax
Department

Implementation Outcome
Costs Costs

Given some set of E(Benefits),

E(Costs) = f(agency costs, implementation costs, outcome costs)

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 Figure 2.
Tax Articles Published in the Top Accounting Journals:
A 10-year Perspective (2007 – 2016)

43