This paper investigates trends in the corporate effective tax rate by replicating the renowned paper of Dyreng et al. published in 2016. Corporate effective tax rates have considerably declined over the period of 1988-2021. Both purely domestic firms and multinationals have seen a decline in effective tax rates with domestics having lower mean effective tax rates than their internationally operating peers. Moreover, both foreign and domestic effective tax rates have decreased for multinationals. Little of the decrease in effective tax rate can be explained by analysing the impact of firm characteristics and tax legislations.
Table of Contents
1. Introduction
2. Hypotheses development
3. Sample and descriptive statistics
4. Main results of hypotheses tests
4.1. The effective tax rates of U.S. corporations have decreased over time
4.1.1. Replication of Dyreng et al.’s model
4.1.2. Extension of the sample period to 2021
4.2. The effective tax rates of multinational firms are declining more over time than those of purely domestic firms
4.2.1. Replication of Dyreng et al.’s model
4.2.2. Extension of the sample period to 2021
4.3. For multinationals the effective tax rate on foreign income declines more over time than does the effective tax rate on domestic income
4.3.1. Replication of Dyreng et al.’s model
4.3.2. Extension of the sample period to 2021
5. Determinants of effective tax rates
5.1. The effect of changes in firm characteristics
5.1.1. Replication of Dyreng et al.’s model
5.1.2. Extension of the sample period to 2021
5.2. The effect of changes in the U.S. tax system over time
5.2.1. Replication of Dyreng et al.’s model
5.2.2. Extension of the sample period to 2021
6. Summary of findings
7. Conclusion
Research Objectives and Themes
The primary objective of this thesis is to provide a comprehensive foundation for understanding the evolution of corporate effective tax rates (ETRs) among U.S. firms. By replicating and extending the empirical models established by Dyreng et al. (2016) to include the period up to 2021, the research investigates whether recent trends continue to show a decline in effective tax burdens and analyzes the impact of firm-specific characteristics and major U.S. tax legislation on these shifts.
- Empirical replication of Dyreng et al.’s (2016) model on ETR trends.
- Longitudinal analysis of effective tax rates for U.S. corporations from 1988 to 2021.
- Comparative analysis of tax burdens between multinational and purely domestic firms.
- Evaluation of the influence of firm characteristics (e.g., R&D, leverage, intangible assets) on ETR outcomes.
- Assessment of the impact of major U.S. tax legislations on corporate tax sheltering behavior.
Book Excerpt
1. Introduction
Over the recent years, companies like Google, Amazon and Starbucks have shown to what extend they can avoid taxes. Some companies which practise elaborate forms of tax avoidance have been publicly scrutinised for doing so. All three companies named in this paragraph are headquartered in the U.S. where companies have been paying considerably lower effective tax rates than the U.S. corporate tax rate mandates. To limit an ever more aggressive tax avoidance, the OECD is working on a multilateral framework. The proposal to impose a global minimum effective tax rate of 15% and to reallocate taxing rights is broadly backed by 137 countries. This will be the first worldwide coordinated attempted to “change to the system of cross-border corporate taxation in a century”.
These are only two examples of what is currently being discussed about corporate taxation which proves to be a multidimensional topic. Simply put, the issue is mainly about companies undergoing considerable efforts to decrease their tax burden and governments feeling like they are missing out on their fair share of corporate profits. To understand or to participate in this discussion specific and in-depth knowledge is required. This paper’s goal is to provide a solid foundation of information by analysing and summarizing data and trends in the effective tax rates of U.S. firms.
Summary of Chapters
1. Introduction: Presents the current global debate on corporate tax avoidance and outlines the motivation for updating the empirical findings from Dyreng et al. (2016) to 2021.
2. Hypotheses development: Defines central concepts like tax planning, avoidance, and evasion, and establishes the three main research hypotheses regarding U.S. corporate tax trends.
3. Sample and descriptive statistics: Details the methodology for data collection via Compustat and explains the filtering processes and variables used in the linear regression approach.
4. Main results of hypotheses tests: Tests empirical hypotheses regarding the downward trend of ETRs over time across various firm types and compares new results with the original Dyreng et al. findings.
5. Determinants of effective tax rates: Analyzes how firm characteristics and specific U.S. tax legislative changes have contributed to the observed fluctuations in ETRs.
6. Summary of findings: Consolidates the empirical evidence and confirms that a downward trend in ETRs persists, though individual factors are noted to vary over the extended sample period.
7. Conclusion: Summarizes the key insights, reinforcing that U.S. companies continue to enjoy ETRs significantly lower than statutory rates despite ongoing efforts to curb tax avoidance.
Keywords
Corporate taxation, effective tax rates, tax avoidance, tax planning, U.S. firms, multinationals, domestic firms, fiscal policy, Dyreng et al., longitudinal analysis, tax legislation, profit shifting, Compustat, tax burdens, corporate finance.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis investigates trends in corporate effective tax rates (ETRs) for U.S. firms, analyzing how these rates have evolved over the past 25 years through an empirical replication and extension of Dyreng et al.’s (2016) study.
What are the primary themes discussed?
The work covers corporate tax avoidance practices, the comparison between multinational and domestic firms, the impact of firm-specific characteristics, and the role of shifting U.S. tax legislation on tax obligations.
What is the primary goal of the research?
The primary goal is to provide a solid evidence-based foundation regarding U.S. corporate tax trends by extending the analysis period up to 2021 to provide modern insights into how ETRs have responded to changing economic landscapes.
Which scientific methods are employed?
The research utilizes simple and multiple linear regression models based on an ordinary least squares (OLS) approach. It also incorporates industry-level clustering and fixed effects to ensure the robustness of the statistical analysis.
What does the main body of the work address?
The main body systematically tests hypotheses regarding declining ETRs, evaluates whether multinational firms face different tax burdens compared to domestic counterparts, and decomposes the determinants of these tax variances using regression models.
Which keywords best characterize the research?
The research is best characterized by its focus on corporate effective tax rates, profit shifting, tax avoidance strategies, longitudinal data analysis, and the quantitative assessment of U.S. tax policy impacts.
How does this study differ from the original 2016 paper by Dyreng et al.?
While this study replicates the original methodology, it extends the analysis period from 2012 to 2021, providing updated context on how recent legislative shifts and the pandemic-era economic environment have influenced corporate tax behavior.
What is the finding regarding the tax burdens of domestic versus multinational firms?
Contrary to the assumption that multinationals always have tax advantages, the analysis indicates that purely domestic firms often face lower effective tax rates on average than their multinational peers.
How have tax legislations specifically affected corporate ETRs?
The analysis demonstrates that major U.S. tax legislations, such as the American Jobs Creation Act or various bonus depreciation rules, have generally acted to accelerate the observed downward trend in ETRs rather than curbing tax avoidance.
- Quote paper
- André Hermann Frank (Author), 2022, Changes in corporate effective tax rates over the past 25 years, Munich, GRIN Verlag, https://www.grin.com/document/1266620
