Topic: Legal Environment and Tax Avoidance: Evidence from state tax code
Time: December 17th 2015  13:00-14:30
Location: Roon 1610 Main Building
Lecturer: Doc. Ma Shuai
hostess:  Associate Professor Wu Qinhong

Lecture Introduction:

To constrain aggressive corporate tax reporting, states have established both criminal penalties on corporate officers and civil penalties on the corporation (i.e., shareholders). Using firms’ state effective tax rates as a measure of tax avoidance, we find that the extent of criminal penalties on corporate officers reduces state corporate income tax avoidance. However, we find no evidence that the extent of civil penalties reduces state corporate income tax avoidance. The results are consistent with the theoretical prediction that penalties imposed directly on corporate officers are more effective at preventing aggressive tax avoidance than are penalties imposed on the corporation (Crocker and Slemrod 2005). Civil penalties on the corporation, however, do appear to reduce state tax avoidance as the value of managerial ownership increases. This finding suggests that civil penalties become more effective at reducing tax avoidance when managerial wealth is tied more closely to shareholder wealth. Finally, criminal penalties on officers have a spillover effect on federal tax avoidance but no association with foreign tax avoidance. Overall, this study provides empirical evidence on the effects of the legal environment on corporate income tax avoidance.