Associate Professor of Accounting
James and Doris McNamara Faculty Scholar for 2019-2020
Stanford Graduate School of Business
Knight Management Center
655 Knight Way
Stanford, CA 94305
We study whether innovation box tax incentives, which reduce tax rates on innovation-related income, are associated with tax-motivated income shifting and local investment in the countries that implement these regimes. Using a matched sample of European multinationals’ subsidiaries operating in Europe, we find evidence consistent with firms engaging in less tax-motivated income shifting out of the country following the implementation of innovation boxes that provide the greatest tax benefits. We also find that innovation box regimes are associated with higher levels of fixed asset investment. Our study contributes to the patent box literature by evaluating outcomes that the literature has not previously examined and by informing the ongoing policy debate regarding the economic effects of innovation box regimes.
We investigate whether intra-firm tax-motivated income shifting affects investment decisions. We model the complex interaction between two affiliates of a multinational corporation when the transfer price is related to an external market price and is used for both tax and internal reporting. Our model predicts that tax aggressiveness and affiliate investment decisions are positively related in equilibrium, and using affiliate-level data on multinational corporations to develop a firmspecific measure of their sensitivity to cross-border tax incentives, our tests find this relation. We further estimate that the typical positive relation between investment opportunities and affiliate investment is reduced by aggressive income shifting, consistent with the model. By empirically testing the theory that income-shifting aggressiveness alters equilibrium production decisions, we document that multinational corporations’ tax considerations alter their investment decisions and extend the literature on investment distortions.
Prior to 2018, U.S. repatriation taxes motivated companies to retain cash offshore. Using confidential jurisdiction-specific data from the Bureau of Economic Analysis, we find that firms with high tax-induced foreign cash have approximately 3.3 percent higher domestic liabilities relative to other multinationals, equivalent to $152.2 million more domestic debt per firm, or approximately $98.9-$141.9 billion in aggregate. We next examine motives for firms with tax-induced foreign cash to borrow domestically, finding this behavior is associated with shareholder payouts and some domestic investment spending. Finally, repatriations and intercompany loans from foreign subsidiaries act as substitutes and complements, respectively, to external borrowings.
We examine the association between thousands of state and local firm-specific tax subsidies and business activity in the surrounding county, measured as the number of employees, aggregate wages, per capita employment, per capita wages, and number of business establishments. Using three different matched control groups, we find a positive association between subsidies and the employment measures. However, we show that local information – measured based on subsidyspecific disclosures, public awareness, and local press coverage – plays an important role in the effectiveness of subsidies. We also demonstrate that (i) receipt of multiple or subsequent subsidies in the same counties is critical for these employment outcomes and (ii) results are concentrated in the largest subsidy packages by dollar value. In addition, we observe mixed evidence for the relation between subsidies and business establishments and find little to no local effects for over 1,000 subsidies that cost approximately $99.8 million in aggregate. By providing a large-scale empirical analysis of the relation between firm-specific tax subsidies and aggregate economic activity at the county level, we extend a literature that generally focuses on the real effects of statutory tax policies that impact all firms in a jurisdiction. We also contribute to the accounting literature by examining the role of the local information environment in subsidy effectiveness.
We exploit a December 22, 2017 law change to examine the relation between corporate taxes and executive compensation. The so-called “Tax Cuts and Jobs Act” (TCJA) repealed a long-standing exception that previously allowed publicly-traded companies to deduct executives’ qualified performance-based compensation in excess of $1 million. The new regime is effective for tax years beginning after December 31, 2017. Using a difference-in-differences design to examine executive compensation paid in fiscal years 2017 and 2018, we find no evidence that firms impacted by the TCJA in their 2018 fiscal years changed total compensation, compensation mix, or pay-performance sensitivity relative to control firms that are not subject to the new regime until their 2019 fiscal years. These findings suggest Congress may have structured the law inefficiently or that Treasury delayed guidance for too long, potentially causing delays in firms’ responses.
We investigate the effects of mandatory private Country-by-Country (CbC) disclosure to European tax authorities on economic activity. Using rich data on the operations of multinational firms, we exploit the threshold-based application of this 2016 disclosure rule in a regression discontinuity design. We find evidence consistent with firms affected by the disclosure mandate reducing ownership in tax haven subsidiaries relative to unaffected firms and thereby increasing transparency in their previously opaque organizational structure. We also observe that affected firms increasingly allocate revenue, employment, total assets, and, correspondingly, tax payments to subsidiaries in low-tax European countries. Additional tests at the consolidated firm-level and at the subsidiary-level support the conclusion that firms shift real activities away from operations outside Europe – including from tax havens – to Europe, particularly to non-haven European countries with low corporate income tax rates. Collectively, our findings suggest that mandatory CbC disclosure curbs the most aggressive tax planning achieved through tax haven operations but also affects the allocation of multinationals’ real economic activities.
Tax enforcement around the world has received increased attention since the Global Financial Crisis, with much focus on curbing the potentially harmful tax practices of multinational entities. Yet it is likely that multinational entities can better respond to home-country enforcement efforts than domestic firms because multinationals have opportunities for tax avoidance in multiple jurisdictions whereas domestic firms do not. We therefore examine whether there is a differential relation between changes in enforcement spending and the tax avoidance of domestic versus multinational entities. Using OECD data on tax enforcement spending by 46 countries from 2005 to 2013, we find that although increases in enforcement spending are related to less firm-level tax avoidance on average, the negative relation is concentrated among domestic firms; we find no little evidence of decreased tax avoidance among multinationals. Our results suggest that domestic firms, not multinationals, bear the burden of increased tax enforcement.