Incentives for Tax Planning and Avoidance: Evidence from the Field

TLDR

Reputational concerns are hypothesized to influence managers' tax planning, but testing this with archival data is challenging. The study investigates firms' incentives and disincentives for tax planning. The authors analyze survey responses from nearly 600 corporate tax executives. The survey shows that 69 % of executives consider reputation important, ranking it second among deterrents to tax planning, and that financial accounting incentives matter, with 84 % of public firms reporting that top management cares about GAAP effective tax rate as much as cash taxes and 57 % seeing earnings‑per‑share increases as an important outcome of tax planning. JEL classifications are D83, G31, M41, and the survey data are confidential, with other data available from public sources.

Abstract

ABSTRACT We analyze survey responses from nearly 600 corporate tax executives to investigate firms' incentives and disincentives for tax planning. While many researchers hypothesize that reputational concerns affect the degree to which managers engage in tax planning, this hypothesis is difficult to test with archival data. Our survey allows us to investigate reputational influences and, indeed, we find that reputational concerns are important—69 percent of executives rate reputation as important and the factor ranks second in order of importance among all factors explaining why firms do not adopt a potential tax planning strategy. We also find that financial accounting incentives play a role. For example, 84 percent of publicly traded firms respond that top management at their company cares at least as much about the GAAP ETR as they do about cash taxes paid and 57 percent of public firms say that increasing earnings per share is an important outcome from a tax planning strategy. JEL Classifications: D83; G31, M41. Data Availability: Survey responses are confidential. Other data are available from public sources identified in the paper.