The Corporate Response to Government Attacks on Tax Shelters

We examine the effectiveness of four federal government actions, all of which were designed to curb the proliferation of corporate tax shelters dating back to the 1990s, at eliciting measurable changes in characteristics commonly associated with tax shelter firms. Our results suggest that the government¡¯s initial attacks on corporate tax shelters in the early 2000s elicited significant declines in book-tax differences, discretionary accruals, and the use of Big N audit firms, which contributed to gradual reductions in the estimated likelihood of tax sheltering for both multinational and purely domestic firms. Conversely, later attempts to discourage corporate tax shelters proved ineffective, likely due in part to the effectiveness of previous government attacks and a faltering economy. This study addresses calls from prior literature for a better understanding of factors determining corporate tax avoidance and offers new evidence of multi-faceted taxpayer reactions to corporate tax reform.