Essays in Tax Policy and Planning

Abstract

This thesis is an effort to advance our knowledge on the economic consequences and determinants of corporate tax policy and planning. First, I consider the effect of bonus depreciation on risk-taking, providing evidence of economy-wide tax effects on economic growth. Next, I investigate the effect of tax planning on production efficiency, providing evidence of firm-level tax effects on economic growth. Finally, I examine the effect of managerial myopia on tax planning, providing evidence that short compensation horizons induce suboptimal tax structures with long-term unintended consequences. In the first essay, I investigate how taxable income shifts affect risk-taking preferences. Starting from 2001, the U.S. Congress offered bonus depreciation tax incentives to promote capital investment. I exploit exogenous variation in the incentive and find that firms respond by increasing risk-taking. Firms invest more in volatile assets, implying that bonus depreciation increases risk-sharing in the economy. I also evidence that small, financially constrained, and unproductive firms benefit the most from the incentive. I contribute to the debate in accounting taxation research about the impact of taxes on risk-taking preferences. Finally, the evidence could inform tax regulators on a potential unintended consequence of the planned phasing out of bonus depreciation from 2023 onward. In the second essay, I investigate whether and how tax planning affects production efficiency. I show that firms engaging in tax planning are more productive and identify two potential economic mechanisms. Specifically, firms reduce the effective tax rate to mute tax system frictions and i) benefit from economies of scale, or ii) invest in knowledge capital. In this study, I provide empirical evidence on the link between tax planning and firm-level economic growth. Hence, I contribute to an emerging literature in accounting taxation investigating the real effects of tax planning. Finally, the evidence could inform ongoing tax policy debates that intend to suppress corporate tax planning. In the third essay, I study the link between tax planning and managerial myopia. I find that vesting equity delta - a measure of myopia - is associated with reductions in the effective tax rate. I further identify equity sales as the economic mechanism, indicating that vesting equity induces short-term stock price concerns. Additionally, I show that managerial myopia triggers suboptimal tax planning that is associated with higher short-term but lower long-term shareholder wealth. In this study, I contribute to the accounting taxation literature by arguing that contract horizons matter for firms' tax outcomes. Finally, the evidence could inform ongoing debates on the effectiveness of executive compensation practices.

Date of Award	23 Jun 2023
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Konstantinos Stathopoulos (Supervisor) & Edward Lee (Supervisor)