The Corporate Profit Base, Tax Sheltering Activity, and the Changing Nature of Employee Compensation
This paper examines the evolution of the corporate profit base and the relationship between book income and tax income for U.S. corporations over last two decades. The paper demonstrates that this relationship has broken down over the 1990s and has broken down in a manner that is consistent with increased sheltering activity. The paper traces the growing discrepancy between book and tax income associated with differential treatments of depreciation, the reporting of foreign source income, and, in particular, the changing nature of employee compensation. For the largest public companies, proceeds from option exercises equaled 27 percent of operating cash flow from 1996 to 2000 and these deductions appear to be fully utilized thereby creating the largest distinction between book and tax income. While the differential treatment of these items has historically accounted fully for the discrepancy between book and tax income, the paper demonstrates that book and tax income have diverged markedly for reasons not associated with these items during the late 1990s. In 1998, more than half of the difference between tax and book income - approximately $154.4 billion or 33.7 percent of tax income - cannot be accounted for by these factors. This paper proceeds to develop and test a model of costly sheltering and demonstrates that the breakdown in the relationship between tax and book income is consistent with increasing levels of sheltering during the late 1990s. These tests also explore an alternative explanation of these results - coincident increased levels of earnings management - and finds that the nature of the breakdown between book and tax income cannot be fully explained by this alternative explanation.
|Date of creation:||Mar 2002|
|Note:||CF LS PE|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan J. Auerbach & James M. Poterba, 1987.
"Why Have Corporate Tax Revenues Declined?,"
NBER Working Papers
2118, National Bureau of Economic Research, Inc.
- Austan Goolsbee, 1997.
"What Happens When You Tax the Rich? Evidence from Executive Compensation,"
NBER Working Papers
6333, National Bureau of Economic Research, Inc.
- Austan Goolsbee, 2000. "What Happens When You Tax the Rich? Evidence from Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 352-378, April.
- Core, John E. & Guay, Wayne R., 2001. "Stock option plans for non-executive employees," Journal of Financial Economics, Elsevier, vol. 61(2), pages 253-287, August.
- Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
- François Degeorge & Jayendu Patel & Richard Zeckhauser, 1997.
"Earnings Management to Exceed Thresholds,"
- Huddart, Steven & Lang, Mark, 1996. "Employee stock option exercises an empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 5-43, February.
- Menachem Brenner & Rangarajan K. Sundaram & David Yermack, 1998.
"Altering the Terms of Executive Stock Options,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
98-010, New York University, Leonard N. Stern School of Business-.
- Tirole, Jean & Fudenberg, Drew, 1995.
"A Theory of Income and Dividend Smoothing Based on Incumbency Rents,"
3160494, Harvard University Department of Economics.
- Fudenberg, Drew & Tirole, Jean, 1995. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 75-93, February.
- Fudenberg, Drew & Tirole, Jean, 1994. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," IDEI Working Papers 34, Institut d'Économie Industrielle (IDEI), Toulouse.
- Brian J. Hall & Jeffrey B. Liebman, 2000.
"The Taxation of Executive Compensation,"
in: Tax Policy and the Economy, Volume 14, pages 1-44
National Bureau of Economic Research, Inc.
- Anand Mohan Goel & Anjan V. Thakor, 2004.
"Why Do Firms Smooth Earnings?,"
- Zimmerman, Jerold L., 1983. "Taxes and firm size," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 119-149, April.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8866. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.