The simplistic exposition of Finance Minister's tax policy for middle lower middle class is heartening, but are such principles kept in view in the vortex of budgeting process? If there is a resource crunch, govt. widens tax net, increase excise and customs duties, services taxes, freight rates and by other means or by printing money to meet budget deficit / fiscal deficit. World security situation is in a flux. Undoubtedly we need more defence preparations as we are terribly behind certain power (s ). Just yester Defence Minister announced Rs.22000 crore for defence preparation. Our allocation on defence is about 4%to 6% on arms etc. China's is about 10%. Pakistan's too is more than ours. If we need security, we have to forget saving.

Our tax system only targets salaried individuals. Small family run businesses deal with cash and hardly pay any taxes. That's the source of black money too. Businesses keep two books, builders do two contracts and so on and so forth. Big businesses get their tax breaks. Therefore, like every where else it is the common hard working men and women who get hurt again due to this old taxation policy. It is imperative that our finance ministry starts to make changes to these existing but not working tax laws.

Tax systems primarily target salaried & big business. Shopkeepers(like bakery and provisions) get more income than us but don't pay tax other than VAT they pay when procure goods. Old British taxation will not work for us. Congress has been sitting on this taxation for 60 years. Modi govt should revamp tax systems

On one hand is the effective collection of taxes.But by the same count is also the misuse and swindling of the finances collected through taxes.Bleeding of the collected revenue should first be stopped effectively.

The finance minister Sh. Arun Jaitley should also pay some attention to his lesser important portfolio of the ministry of information and broadcasting too. Some projects of this ministry entailing huge expenditure are still lying defunct due to lack of attention. One of such projects is of All India Radio in Amritsar, on which twenty five crores have been spent, but its commissioning is not in sight.

If India is to go for Development and Growth, India should look for Capital Formation ... a basic step for Development ... India should promote and encourage DOMESTIC SAVINGS by ABOLISHING INCOME TAX ... JUST TAX THE EXPENDITURE ... people will SAVE MORE ... thus CAPITAL FORMATION STARTS ...

Subramanyam Swamy is absolutely RIGHT in asking for it ... It is a Fundamental Principle of Economics ... but A GROSSLY NEGLECTED & UN-UTILISED TOOL by the People who call themselves The Saviors of the Economy ...

If India is to go for Capital Formation ... a basic step for Development ... India should promote and encourage DOMESTIC SAVINGS by ABOLISHING INCOME TAX ... JUST TAX THE EXPENDITURE ... people will SAVE MORE ... thus CAPITAL FORMATION STARTS ...

Subramanyam Swamy is absolutely RIGHT in asking for it ... It is a Fundamental Principle of Economics ... but A GROSSLY NEGLECTED & UN-UTILISED TOOL by the People who call themselves The Saviors of the Economy ...

Latest and Hottest NEWSSTREAM, Oops, SCREAM...
Finance Minister, Shri Arun Jaitley resigned and migrated to Australia.

Stay tuned.......

...and I am Sid Harth

characteristics that can change over time and could plausibly be related to tax avoidance, as is
discussed in more detail below.
We retain firm-years with an executive change and all available prior and subsequent years for
the firm. The years outside the executive tenure allow a better estimation of the firm effect versus
the executive effect. Thus, we employ a panel data set in all tests.
Within the title
EXEC
, we also separately identify executives by title


e.g., CEO, CFO, or
some non-CEO, non-CFO title

. To do this, we classify executives according to the title last listed
on ExecuComp for the individual. Coding each title separately allows us to test each group of
executives while controlling for the effects of the other executives


for example, using a joint
F-test, we can test the effect of CEOs while controlling for the effects of CFOs

.
If we find that executives matter, it could be that executives have different styles that they
impose on the firm or it could be that the firm hired the executives because of their style


e.g., a
tax avoider

. Because we control for the firm effect, however, only if the firm changed objectives
and hired executives with different styles through time could our results be due to matching
between the firm and executives; otherwise the new executive’s style would be the same as the old
executive’s and the effect would be captured by the firm indicator variable.
As noted earlier,
CONTROL

in the above equation represents a vector of time-varying,
firm-level controls. When deciding upon a research design, we gave considerable thought to the
variables to include in
CONTROL

. The more variables we include in
CONTROL

, the less
variation we leave for the executive effect to “pick up.” In other words, if executive choices affect
the variables in our vector of controls, then including these controls could drive the executive fixed
effect coefficients toward zero. For example, consider an executive’s choice to increase spending
on research and development


R&D

. Assume that this spending generates additional research and
development tax credit, which reduces the effective tax rates of the firm


note that R&D spending
is expensed for financial reporting so the denominator of our ratios is also reduced, but assuming
the amount is creditable likely results in reduced effective rates

. What we cannot separate in our
tests is whether the executive increased the R&D spending in order to reduce the tax rate or
whether the executive increased the R&D spending for other reasons and a byproduct of this
decision is a reduced tax rate. If we include R&D as a control variable in the regression, then the
implicit assumption in the research design is that the R&D spending was for a nontax reason that
we want to control for in our tests and remove from the manager effect coefficient. If we do not
include R&D as a control variable in the regression, then the implicit assumption in the research
design is that the effect of the increased R&D spending on the tax rate is intentional on the part of
management, such that the regression will place that effect in the executive’s fixed effect coeffi-
cient. Since we obviously do not know the extent to which each decision an executive makes is
explicitly for tax reasons, we have to arbitrarily choose between these two designs and interpret
the results accordingly.
With this caveat in mind, we have chosen to estimate our main analyses after including a wide
range of variables in
CONTROL

. We draw these variables from prior effective tax rate literature


e.g.,
Mills et al. 1998
;
Rego 2003

. We include
ADVERTISING
expense,
CAPITAL EXPENDI-
TURES
,
ESTIMATED OPTION EXPENSE
, an indicator for whether the firm has
FOREIGN OP-
ERATIONS
, the ratio of
INTANGIBLE TO TOTAL ASSETS
,
LEVERAGE
,
SIZE
, an indicator for
whether the firm has a
NET OPERATING LOSS (NOL)
,
GROSS PROPERTY PLANT & EQUIP-
MENT
,
SG&A
expense and
R&D
expense.
11
We also estimate the regression with only a minimal
set of controls


NOL
and
SIZE

in an untabulated robustness check, finding very similar results.
11
Variable definitions are found in Table
2
. When using SG&A as a control variable in Equation


1

, missing values are
set to 0.

pre-tax income.
9
The mean
GAAP ETR
in the sample is 30.9 percent, with a median of 33.7
percent. We also measure firms’ cash effective tax rates


CASH ETR

as the ratio of cash taxes paid
to pretax income. The sample firms have
CASH ETR
s with a mean of 26.3 percent and a median
of 24.9 percent.
10
The observation that
CASH ETR
is lower than
GAAP ETR
is consistent with
firms on average having lower taxable income than pretax accounting income, and is consistent
with prior research. In addition, we recognize that
CASH ETR
is more volatile than
GAAP ETR
and potentially noisy on an annual basis and, thus, results may be more difficult to document


Dyreng et al. 2008

. Note that the number of observations changes over the measures because if
the denominator is negative for either ratio or if the cash taxes paid is not disclosed or negative,
then we code that observation as missing.
We also present a number of other variables in Table
2
that are used later when we investigate
whether executives’ tax avoidance effects are associated with the executives’ effects on other
corporate actions and outcomes. These other nontax variables are all defined in Table
2
and
include measures such as
EBITDA
, research and development expense


R&D

, advertising ex-
pense


ADVERTISING

, and selling, general, and administrative expense


SG&A


unless other-
wise noted, variables are scaled by beginning total assets

. Because we include firms that have a
departing/incoming executive at some point in the sample period, we compare our descriptive
statistics to those of the Compustat population to get a sense of whether our firms are somehow
different, which would limit generalizability. We find that our sample firms are slightly more
profitable and invest slightly more in R&D, but are not substantially different from the typical firm
on Compustat


results untabulated

. We next turn to the primary empirical analysis.
IV. EMPIRICAL ANALYSIS
Primary Specification
Our primary research question is whether individual executives matter for firm tax avoidance.
As discussed in
Bertrand and Schoar


2003

, much of the prior literature has either assumed that
all executives are homogeneous and provide selfless inputs into the firm’s processes or that even
if executives are heterogeneous, they cannot easily affect firm policies. An opposing view from
standard agency models is that executives have discretion within their own firms and use this
discretion to affect corporate decision making and possibly to advance their own objectives.
The identification strategy is a regression based on
Bertrand and Schoar


2003

that uses a
panel of data:
ETR
it
=

0
+

k

k
CONTROL
it
k
+

t

t
YEAR
t
+

i

i
FIRM
i
+

m

m
EXEC
m
+

it
,


1

where
ETR
it
is
GAAP ETR


or
CASH ETR
, each tested in separate regressions

;
FIRM
i
is a
separate indicator variable for each firm,
i


firm fixed effects

;
YEAR
t
is a separate indicator
variable for each year,
t


year fixed effects

;

it
is the error term.
EXEC
m
is a separate indicator for
each executive,
m


executive fixed effects

, and is our main variable of interest. The firm fixed
effects in the model control for all stationary firm characteristics such as industry and stationary
firm-level strategies for tax avoidance. The vector of control variables,
CONTROL
k
, reflects firm
9
Pretax income is measured as income before discontinued operations and extraordinary items and excludes special
items. ETRs with negative pretax income are set to missing. The remaining non-missing ETRs are winsorized


reset

so
that the largest observation is 1 and the smallest is 0. While we would like to measure long-run cash effective tax rates
as in
Dyreng et al.


2008

, it is not possible for us to examine both manager changes and estimate tax rates over a
ten-year span.
10
The annual cash tax rates are similar to the rates in
Dyreng et al.


2008

, which used a larger sample but required firms
to have positive income summed over a ten-year period. The mean annual cash tax rate


measured similarly

in
Dyreng
et al.


2008

is 27 percent and the median is 25.6 percent

TABLE 2
Descriptive Statistics
Variable n Mean
Std.
Dev.
25th
Percentile
50th
Percentile
75th
Percentile
GAAP ETR
10,355 0.309 0.154 0.249 0.337 0.381
CASH ETR
10,124 0.263 0.195 0.133 0.249 0.347
EBITDA
12,716 0.153 0.119 0.084 0.140 0.210
R&D
12,958 0.045 0.117 0.000 0.000 0.032
ADVERTISING
12,958 0.011 0.110 0.000 0.000 0.007
SG&A
9,545 0.297 0.254 0.136 0.241 0.381
CAPITAL EXPENDITURES
10,109 0.298 0.349 0.120 0.199 0.338
PERCENTAGE CHANGE IN SALES
12,926 0.155 0.350 0.004 0.087 0.215
LEVERAGE
12,586 0.246 0.186 0.097 0.237 0.357
CASH HOLDINGS
12,578 0.158 0.257 0.019 0.059 0.187
FOREIGN OPERATIONS
12,958 0.470 0.499 0.000 0.000 1.000
NET OPERATING LOSS
12,958 0.273 0.446 0.000 0.000 1.000
SIZE
12,958 7.699 1.819 6.424 7.587 8.878
ESTIMATED OPTION EXPENSE
12,958 0.028 0.132 0.000 0.000 0.005
INTANGIBLE TO TOTAL ASSETS
12,958 0.126 0.192 0.000 0.038 0.182
GROSS PP&E TO TOTAL ASSETS
12,089 0.643 0.453 0.283 0.548 0.947
This table describes the variables used in the study. As each variable is described, the Compustat pneumonic is in
parentheses.
Variable Definitions:
GAAP ETR


the financial accounting effective tax rate, defined as total income tax expense


TXT

divided by pre-tax book income


PI

before special items


SPI

;
CASH ETR


the cash effective tax rate, defined as cash tax paid


TXPD

divided by pre-tax book
income


PI

before special items


SPI

;
EBITDA


earnings before interest, taxes, depreciation, and amortization


OIBDP

scaled by
lagged total assets


AT

;
R&D


research and development expense


XRD

divided by net sales


SALE

; when missing,
reset to 0;
ADVERTISING


advertising expense


XAD

divided by net sales


SALE

; when missing, reset to 0;
SG&A


selling, general, and administrative expense


XSGA

divided by net sales


SALE

;
missing values of
SG&A
are set to 0 when used as a control variable in Equation


1

;
CAPITAL EXPENDITURES


reported capital expenditures


CAPX

divided by gross property, plant, and equipment


PPEGT

;
PERCENTAGE CHANGE IN
SALES


the annual percentage change in net sales



SALE
t
/
SALE
t
−1

−1

;
LEVERAGE


the sum of long-term debt


DLTT

and long-term debt in current liabilities


DLC

divided by total assets


AT

;
CASH HOLDINGS


cash and cash equivalents


CHE

divided by total assets


AT

;
FOREIGN OPERATIONS


the firm has a non-missing, non-zero value for pre-tax income from foreign operations


PIFO

;
SIZE


the natural log of total assets


AT

;
NET OPERATING LOSS


an indicator if the firm has a non-missing value of tax loss carry-forward


TLCF

;
ESTIMATED OPTION
EXPENSE


calculated from ExecuComp as the average annual value realized from exercise of
options for the top executives grossed up by the fraction of options owned by the covered
executives, scaled by average total assets;
INTANGIBLE TO TOTAL
ASSETS


the ratio of intangible assets


INTANG

to total assets


AT

; and
GROSS PP&E TO TOTAL
ASSETS


gross property, plant, and equipment


PPEGT

divided by total assets


AT


casts

.
Ge et al.


2009

investigate whether manager effects are significant in financial accounting
outcomes such as discretionary accruals, off-balance-sheet activities, and conservatism.
III. SAMPLE AND DESCRIPTIVE STATISTICS
The sample begins with all executives listed in the ExecuComp database for the years 1992 to
2006. We track executives across firms and retain those executives who were employed for at least
three years in each of at least two different firms. We impose minimal data requirements, requiring
that the firm-year be listed on Compustat with total assets available. We then inspect each execu-
tive change to ensure that they were actual changes of firms. The resulting sample includes 12,958
firm-years of data, corresponding to 1,138 distinct firms, and 908 distinct executives.
Table
1
shows the breakdown of executives by their current title


i.e., the last title listed for
the executive on ExecuComp

and their prior title. Overall, the sample contains 351 executives
whose last title is CEO, 195 whose last title is CFO, and 362 whose last title is something else


e.g., president, vice-president

. There are 101 instances where an executive was CEO of one firm
listed in ExecuComp and moved to become CEO of another firm. There are few instances of a
CEO of one firm going to take a lower title at another firm—in only four cases did a CEO later
take on the title of CFO and in 58 cases a CEO later took on a non-CEO, non-CFO title. Being a
CFO, on the other hand, is sometimes a stepping-stone to becoming CEO at another firm. This
transition occurs 33 times in our sample, while 160 times a CFO makes a move to another firm but
retains the same title. Finally, there are 217 instances of executives with titles other than CEO and
CFO going on to become CEOs. In 31 cases a non-CEO/non-CFO moves to become a CFO and
in 281 cases moves to another non-CEO/non-CFO position.
Table
2
presents descriptive statistics for the 12,958 firm-years in our sample. The effective
tax rate variable


GAAP ETR

is measured as total tax expense


current and deferred

divided by
TABLE 1
Frequency of Executive Changes
Prior Title
Current Title
CEO CFO Other Total
CEO 101 4 58 163
CFO 33 160 23 216
Other 217 31 281 529
Total 351 195 362 908
This table describes title changes as executives move from one company to another. The sample is a total of 908 executives


351 CEOs, 195 CFOs, and 362 other executives

. Each executive is required to be employed by at least two different
firms, for at least three years at each firm. The columns across the top describe the executives’ title in the last firm in which
the executives were observed


current title

, while the rows describe the title at the firm in which the executives were
employed before the last firm. For example, the cell in the first column and first row describes CEOs that are CEO in their
current firm


last firm listed in ExecuComp

and were CEO at the firm where they were previously employed. In the case
of executives who were employed by more than two firms for at least three years, the table represents their last change
only

shelter firms carry less debt


i.e., whether the shelters are non-debt tax shields

; and
Wilson


2009

provides evidence that shelter firms have higher market returns as long as the firm’s governance is
“good”


measured by the
Gompers et al.

2003

governance index

.
In sum, prior research has investigated how to measure tax avoidance


e.g.,
Dyreng et al.
2008

, the firm-level determinants of tax avoidance, and, to some extent, on the consequences of
tax avoidance. While the effect of the CEO or other top management has recently been investi-
gated with other performance outcomes of the firm


discussed in the next section

, little attention
has been given to whether individual executives have an impact on how much tax the firm avoids.
7
We address this question. This is an important step in identifying factors that make some firms
more able to avoid tax than others. We do not investigate the consequences of tax avoidance
resulting from executive effects. We look forward to research on this and related questions in the
future.
The Effects of CEOs and Other Top Executives on Other Aspects of Firm Performance
How much of an effect the top executives and the “tone at the top” these executives set has on
various aspects of firm performance and shareholder value is a question that is attracting increased
attention. For example,
Hayes and Schaefer


1999

estimate how much executives are worth to
shareholders by identifying firm/executive separations and computing the abnormal returns sur-
rounding the separations.
8
Bertrand and Schoar


2003

examine whether top executives affect firm
performance and decisions by constructing a sample of executives who have moved across at least
two firms and investigating the executives’ effects on these firms. By tracking executives who
change firms, we can separate the firm effect from the executive effect on corporate behavior and
performance.
Several other studies examine the relation between CEO characteristics or CEO personal
events and company performance. For example,
Chatterjee and Hambrick


2007

examine narcis-
sistic CEOs and company performance, while
Liu and Yermack


2008

find that future company
performance deteriorates when CEOs acquire very large homes or estates.
Malmendier and Tate


2009

report evidence that CEOs who win awards from the business press


e.g., being named to
BusinessWeek
’s “Best Managers” list

underperform relative to their peer group after winning the
award


similar to the
Sports Illustrated
“Jinx”

.
Bennedsen et al.


2008

use data from Denmark
and report that CEOs’


but not board members’

own and family deaths are strongly correlated
with declines in firm operating performance. The most meaningful deaths for the CEOs, as might
be expected, are the death of a child or a spouse, whereas the death of a mother-in-law has very
little impact upon performance.
There are also several concurrent studies that use the
Bertrand and Schoar


2003

methodol-
ogy to examine executive effects on accounting outcomes. For example,
Bamber et al.


2010

examine executive fixed effects on corporate financial disclosure policies and find that individual
managers have a significant effect on voluntary disclosure


measured using management fore-
7
There are other studies broadly related to the questions examined in this study. One is
Chen et al.


2010

, which
examines whether family owned/run firms are more tax aggressive than non-family owned/run firms. The authors find
that family owned/run firms are less aggressive because they try to convince minority shareholders that family members
are not rent-extracting through complicated tax structures. Thus, while
Chen et al.


2010

examine the effects of certain
types of ownership it is not a test of whether executives matter to tax avoidance absent family ownership


note our study
is about managers that change jobs so they are not likely members of the founding family

. Another is
Frank et al.


2009

, which examines whether firms that are aggressive for tax purposes are aggressive for financial accounting
purposes and whether firms that are aggressive for both have other similar corporate policies.
8
See also
Johnson et al.


1985

, which examines the market reaction to the sudden deaths of executives


53 events

.The
authors find the market reaction is associated with founder status, decision-making responsibilities, and estimates of
transaction costs for negotiating employment agreements. See also
Pourciau


1993

and
Murphy and Zimmerman


1993

.

executive is a significant determinant of
CASH ETR
, an important finding given that none of the
aforementioned studies investigating firm-level incentives document any effect on
CASH ETR
.
Our findings raise many questions that we hope will be the addressed in future research. What
happens to these executives and the firms they manage in the future? Tax avoidance can be
value-enhancing to the firm but not necessarily so. Perhaps the executives who appear to empha-
size tax avoidance simply make their firms take on substantial tax risk. In that case, we might
expect to see additional taxes being paid in future years as the firms undergo audit by the IRS,
perhaps on another executive’s watch. It would be interesting to know what happens to the career
prospects of executives who emphasize or de-emphasize tax avoidance. These are just a few of the
questions raised by this study that we believe can lead to further research.
In the next section we review the prior literature, specifically the prior research on executive
effects and the literature on tax avoidance. In Section III we discuss our sample selection and
present descriptive statistics. We present the empirical analysis in Section IV and conclude in
Section V.
II. PRIOR LITERATURE
Prior Literature on Tax Avoidance
Tax avoidance has been of interest to researchers for decades, yet surprisingly little empirical
evidence exists about cross-sectional variation in tax avoidance, and until recently there has been
little research on executives’ roles in tax avoidance. We discuss both briefly here and refer readers
to
Hanlon and Heitzman


2010

for a broad review of the literature.
Firm-level characteristics such as size, economies of scale via foreign operations, tax plan-
ning, and other factors have been examined as determinants of tax avoidance, where tax avoidance
has been measured in a variety of ways.
5
In a pioneering study that examines the role of manager
incentives,
Phillips


2003

uses private survey data to investigate whether compensating managers
based on pre-tax or after-tax earnings affects
GAAP ETRs
.
Phillips


2003

finds that compensation
for managers of business units based on income measured after taxes


as compared to before tax

appear to be associated with a lower GAAP effective tax rate; however, this same association does
not hold for CEO performance measures.
6
Recent studies in this area of incentive effects on tax
avoidance include
Desai and Dharmapala


2006

, which examines “high-powered” incentives and
tax avoidance;
Armstrong et al.


2009

, which is the first to examine compensation of tax direc-
tors;
Rego and Wilson


2009

, which examines links between top executive compensation and tax
aggressiveness; and
Robinson et al.


2010

, which examines the effects on ETRs of treating the tax
department as a profit center. Finally, in studies of tax shelter firms


an alternative measure of tax
avoidance

,
Wilson


2009

and
Lisowsky


2009

examine firm characteristics associated with tax
sheltering.
There has been much less research on the consequences of tax avoidance.
Desai and Dhar-
mapala


2008

examine the effects of tax avoidance on firm value, and
Hanlon and Slemrod


2009

examine market reactions to tax shelter involvement.
Jennings et al.


2009

find an asso-
ciation between tax avoidance and implicit taxes;
Graham and Tucker


2006

examine whether tax
5
See
Zimmerman


1983

,
Gupta and Newberry


1997

,
Mills et al.


1998

,
Rego


2003

,
Siegfried


1974

,
Porcano


1986

,
Stickney and McGee


1982

, and
Shevlin and Porter


1992

. In addition, see
Callihan


1994

for a summary of
annual effective tax rate research.
6
Phillips


2003
,869

interprets these results by stating that, “After-tax CEO performance measures could have an indirect
negative effect on ETRs, however, because CEOs compensated after-tax are more likely to compensate their BU
managers on an after-tax basis” and that other incentives such as job retention are perhaps sufficient to motivate CEOs
to focus on after-tax results.

We use a technique developed in the economics literature by
Bertrand and Schoar


2003

that
involves tracking individual executives who served as top executives at more than one firm. Using
this technique, we can observe whether particular executives appear to have systematic effects on
their firms’ tax avoidance. We can test, for example, whether Firm A’s tax avoidance changes when
Executive X is hired and whether it changes again when s/he leaves to run Firm B. The executives
we track include the CEO, CFO, and other top executives listed in the ExecuComp database that
were employed by more than one firm, which allows us to isolate executive effects apart from firm
effects. We identify 908 executives who worked for at least two firms and were employed by each
firm for at least three years between 1992 and 2006. Following the approach in
Bertrand and
Schoar


2003

, we regress the firm’s effective tax rate on firm fixed effects, year fixed effects, and
executive fixed effects. Thus, all stationary characteristics of the firm are controlled in our speci-
fication through the firm fixed effect, and any time-specific, cross-sectional effects on effective tax
rates are controlled through the year fixed effects. In our main tests we also control for time-
varying characteristics of the firm through a set of control variables


e.g., size, leverage, R&D

.
Results indicate that individual executives play a statistically and economically significant
role in determining the level of tax avoidance that firms undertake. While the results are slightly
stronger for CEOs


i.e., for executives who were CEOs in the last year of their career in our data

,
the results also hold for CFOs and other executives covered by ExecuComp. The frequency of
significant executives is far greater than would be observed under the null hypothesis that tax
avoidance is determined by the characteristics of the firm, but not the individual executive
per se
.
We also examine executives in event-time as they move across firms, and we illustrate the effects
they have on their firms’ effective tax rates as they join and later depart from the firm. Finally, we
conduct a number of robustness tests, which consistently show significant executive effects on
both
GAAP ETR
and
CASH ETR
.
After establishing an executive effect, we investigate whether tax avoidance is associated with


1

other executive effects that represent broader styles such cost-cutting or growth strategies
and/or


2

executive biographical characteristics. There appears to be little connection between
these factors and tax avoidance. We note that the lack of a strong association with other styles or
manager characteristics does not mitigate our main result that the executive matters. It simply
means there are not identifiable, common characteristics that can explain executive-specific tax
avoidance—the executive effects on tax avoidance appear to be idiosyncratic.
To our knowledge, ours is the first study to find and quantify the effects that individual top
executives have on tax avoidance. As
Bertrand and Schoar


2003

state, the neoclassical view of
the firm is that the same decisions are made regardless of the executive in office. Prior and
contemporaneous research in the tax avoidance area takes the neoclassical view, whereby tax
avoidance is viewed as driven by firm characteristics and executive compensation but the indi-
vidual executive is assumed to not matter.
4
Our study broadens the view of what drives tax
avoidance to include the individuals in the top executive positions.
Our study is distinct from the prior and contemporaneous tax avoidance literature in three
ways. First, we posit and find effects from the executives themselves. We view our consideration
of the role of executives to be an important step toward a better understanding of the substantial
variation in tax avoidance that prior research has found across firms, even among firms in the same
industry


e.g.,
Dyreng et al. 2008

. Second, because of our research design, we are able to quantify
the tax avoidance effects of individual executives, something that no prior study has been able to
do, and we find these effects are economically significant. Third, our results indicate that the
4
Studies focusing on the role of compensation and tax avoidance include
Phillips


2003

,
Armstrong et al.


2009

,
Rego
and Wilson


2009

, and
Robinson et al.


2010

.

considers the possibility that individual top executives are partially responsible for variation in tax
avoidance across firms. Essentially, we posit that a given firm’s tax avoidance will differ depend-
ing on whether it is run by Executive A versus Executive B. We find that not only do executives
matter incremental to firm characteristics, but also they appear to matter in a big way.
At first thought, it might be hard to imagine a top executive having an individual effect on the
firm’s tax avoidance. The typical CEO is almost never a tax expert. While the typical CEO is
unlikely to understand the ins and outs of common tax strategies, he/she likely understands the
competitive nature of his/her industry and the potential for expansion to generate operational
economies of scale. Thus, it is reasonable that a CEO could affect the firm’s operational and
financial strategies, but perhaps less so the firm’s tax avoidance activities.
However, a CEO can affect tax avoidance by setting the “tone at the top” with regard to the
firm’s tax activities. For example, some CEOs may change the relative emphasis of different
functional areas of the firm


e.g., marketing, operations, treasury, tax

and the resources allocated
to hiring different advisors both within and outside of the firm.
1
Further, the tone at the top could
extend to setting the compensation incentives of the tax director


who has direct involvement for
the firm’s tax decisions

.
2
Anecdotal evidence is consistent with the tone at the top influence of top
executives. For example, in deposition testimony, David Bullington, Wal-Mart’s vice president for
tax policy, stated that he began to feel pressure to lower the company’s effective tax rate after the
current chief financial officer, Thomas Schoewe, was hired in 2000. “Mr. Schoewe was familiar
with some very sophisticated and aggressive tax planning
...
And he rides herd on us all the time
that we have the world’s highest tax rate of any major company,” Mr. Bullington said, according
to a transcript of the deposition


Drucker 2007
,A1

.
It is important to clarify at the outset what we mean by the term “tax avoidance.” As in
Dyreng et al.


2008

, we define tax avoidance broadly to encompass anything that reduces the
firm’s taxes relative to its pretax accounting income. We are not attempting to measure tax ag-
gressiveness, tax risk, tax evasion, or tax sheltering. To keep our measures of tax avoidance broad
and easy to understand, we examine two standard measures. The first is the firm’s effective tax rate
as defined under GAAP


hereafter,
GAAP ETR

, which is total tax expense


current plus deferred
tax expense

divided by pre-tax accounting income


adjusted for special items

. The second
measure is the firm’s cash taxes paid divided by pre-tax accounting income


adjusted for special
items


hereafter, cash effective tax rate, or
CASH ETR

. We use both measures in order to capture
the various objectives managers may have when it comes to tax avoidance. To the extent that
managers are concerned about reducing tax expense for financial accounting purposes, the use of
our first measure,
GAAP ETR
, will capture the executive’s propensity to affect this metric. To the
extent that managers are concerned with reducing actual cash taxes paid, our second metric,
CASH
ETR
, will capture the effects on this cash tax rate. We refer to the measures collectively as
effective tax rates.
3
1
Anecdotal reports are that firms differ greatly in how involved tax advisors are in structuring transactions and that this
variation likely contributes to differing levels of tax avoidance. For example, in a survey of 150 firms, CFO Research
Services, in collaboration with Deloitte Tax LLP, report that roughly 50 percent of the firms surveyed said that the tax
department has a substantial role in major transactions and only around 25 percent responded that the tax department
played a substantial role in making operating decisions


CFO Research Services and Deloitte Tax LLP 2006

.
2
This idea is consistent with the discussion in
Crocker and Slemrod


2005

and the findings in
Armstrong et al.


2009

discussed below.
3
Executives can avoid or manage the expense without affecting cash taxes paid and can affect cash taxes paid without
affecting the total tax expense. For example, if firms


or executives

change their valuation allowance, tax contingency
reserve, or the amount of foreign earnings designated as permanently reinvested they can change the
GAAP ETR
but
these actions would not change the
CASH ETR
. Conversely, if a firm accelerates tax depreciation relative to book
depreciation


which is an expense in the denominator–pre-tax income

it would reduce cash taxes paid but not the
GAAP
ETR


since the deferred tax expense would increase

.

The Effects of Executives on Corporate Tax
Avoidance
Scott D. Dyreng
Duke University
Michelle Hanlon
Massachusetts Institute of Technology
Edward L. Maydew
University of North Carolina
ABSTRACT:
This study investigates whether individual top executives have incremen-
tal effects on their firms’ tax avoidance that cannot be explained by characteristics of
the firm. To identify executive effects on firms’ effective tax rates, we construct a data
set that tracks the movement of 908 executives across firms over time. Results indicate
that individual executives play a significant role in determining the level of tax avoid-
ance that firms undertake. The economic magnitude of the executive effects on tax
avoidance is large. Moving between the top and bottom quartiles of executives results
in approximately an 11 percent swing in GAAP effective tax rates; thus, executive
effects appear to be an important determinant in firms’ tax avoidance.
Keywords:
tax avoidance; effective tax rate; executive fixed effects
.
Data Availability:
Data used in this study are available from public sources identified in
the document.
I. INTRODUCTION
T
his study investigates whether individual executives have incremental effects on their
firms’ tax avoidance that cannot be explained by characteristics of the firm. Despite de-
cades of empirical research in corporate taxation, little attention has been focused on
whether individual executives have an effect on their firms’ tax avoidance


for reviews see
Shack-
elford and Shevlin

2001

and
Graham

2003


. In this prior literature, executives were either
ignored or treated as homogenous inputs to the tax avoidance process. In contrast, our study
We thank Vic Anand, Mark Nelson, Tom Omer


editor

, two anonymous referees, and workshop participants at The
University of Arizona, Arizona State University, University of California, Berkeley, Cornell University, The University of
Georgia, University of Notre Dame, University of Pennsylvania, and Stanford University. We thank Nemit Shroff, Jake
Thornock, and the Kresge Library staff at the University of Michigan for assisting with the collection of the executive
biographical data. Professor Dyreng acknowledges financial support from the Deloitte Doctoral Fellowship. Professor
Maydew acknowledges financial assistance from the David E. Hoffman Chair at the University of North Carolina.
Editor’s note: Accepted by Thomas Omer
THE ACCOUNTING REVIEW
American Accounting Association
Vol. 85, No. 4 DOI: 10.2308/accr.2010.85.4.1163
2010
pp. 1163–1189
Submitted: June 2008
Accepted: December 2009
Published Online: June 2010

First act on the last para,and unearth the mountain of black money inside the country.But it is said easier than done for these guys only fill your party's election coffers.
So what amounts to these statements of the FM.Nothing but lazy musings.

Hang Jaitley for Sedition

November 22, 2014

/

elcidharth

...and I am Sid Harth

They are already overburdened, who made him FM? Why dont you remove income tax for middle class.

Who? Middle class and salaried? If yes, then read the article carefully, this is what he is saying that he is against putting any burden on salaried and middle class.

If you have the quality to become the FM, why don't you get into Arun Jaitley's twitter address and have a chat. Healthy criticism would survive and our mindset should be adjusted to the reality.

What quality he has? A degree of LLB?......lol

Q: Are you a Congi or AAPee? First say that, then we can decide whether you are serious or just being an a-h0l3.

I am a HIndu Nationalist, thats all.

No wonder Modi has banned/ ished his ministers (except Smriti Irani) form making unwarranted statements to the press. Arun Jaitley has violated Modi's code of silence. That is an act of sedition. Hang him Modiji, before the next Republic Day parade of fools, Modi being a top fool.

...and I am Sid Harth

yu are a sutiya

Table 1: Empirical Studies on the Effects of Taxes on Economic Growth

Reference

Method/Data

Effects

Summary of Findings

1

Ergete Ferede & Bev Dahlby, The Impact of Tax Cuts on Economic Growth: Evidence from the Canadian Provinces, 65 National Tax Journal 563-594 (2012).

Canadian provinces (1977-2006)

Negative

Reducing corporate income tax 1 percentage point raises annual growth by 0.1 to 0.2 points.

2

Karel Mertens & Morten Ravn, The dynamic effects of personal and corporate income tax changes in the United States, American Economic Review (forthcoming) (2012).

U.S. Post-WWII exogenous changes in personal and corporate income taxes

Negative

A 1 percentage point cut in the average personal income tax rate
raises real GDP per capita by 1.4 percent in the first quarter and by up
to 1.8 percent after three quarters. A 1 percentage point cut in the
average corporate income tax rate raises real GDP per capita by 0.4
percent in the first quarter and by 0.6 percent after one year.

3

Norman Gemmell, Richard Kneller, & Ismael Sanz, The Timing and Persistence of Fiscal Policy Impacts on Growth: Evidence from OECD Countries, 121 Economic Journal F33-F58 (2011).

17 OECD countries (Early 1970s to 2004)

Negative

Taxes on income and profit are most damaging to economic growth
over the long run, followed by deficits, and then consumption taxes.

4

Jens Arnold, Bert Brys, Christopher Heady, Åsa Johansson, Cyrille Schwellnus, & Laura Vartia, Tax Policy For Economic Recovery and Growth, 121 Economic Journal F59-F80 (2011).

21 OECD countries (1971 to 2004)

Negative

Corporate taxes most harmful, followed by taxes on personal
income, consumption, and property. Progressivity of PIT harms growth. A 1
percent shift of tax revenues from income taxes (both personal and
corporate) to consumption and property taxes would increase GDP per
capita by between 0.25 percent and 1 percent in the long run. Corporate
taxes, both in terms of the statutory rate and depreciation allowances,
reduce investment and productivity growth. Raising the top marginal rate
on personal income reduces productivity growth.

5

Robert Barro & C.J. Redlick, Macroeconomic Effects of Government Purchases and Taxes, 126 Quarterly Journal of Economics 51-102 (2011).

U.S (1912 to 2006)

Negative

Cut in the average marginal tax rate of one percentage point raises next year’s per capita GDP by around 0.5%.

6

Christina Romer & David Romer, The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks, 100 American Economic Review 763-801 (2010).

U.S. Post-WWII (104 tax changes, 65 exogenous)

Negative

Tax (federal revenue) increase of 1% of GDP leads to a fall in
output of 3% after about 2 years, mostly through negative effects on
investment.

7

Alberto Alesina & Silvia Ardagna, Large changes in fiscal policy: taxes versus spending, in Tax Policy and the Economy, Vol. 24 (Univ. of Chicago Press, 2010).

OECD countries (fiscal stimuli and fiscal adjustments, 1970 to 2007)

Negative

Fiscal stimuli based upon tax cuts more likely to increase growth
than those based upon spending increases. Fiscal consolidations based
upon spending cuts and no tax increases are more likely to succeed at
reducing deficits and debt and less likely to create recessions.

8

International Monetary Fund, Will it hurt? Macroeconomic effects of fiscal consolidation, in World Economic Outlook: Recovery, Risk, and Rebalancing (2010).

15 advanced countries (170 fiscal consolidations over the last 30 years)

Negative

1% tax increase reduces GDP by 1.3% after two years.

9

Robert Reed, The robust relationship between taxes and U.S. state income growth, 61 National Tax Journal 57-80 (2008).

U.S. states (1970-1999, 5 year panels)

Negative

Robust negative effect of state and local tax burden. Multi-year
panels mitigate misspecified lag effects, serial correlation, and
measurement error.

10

N. Bania, J. A. Gray, & J. A. Stone, Growth, taxes, and government expenditures: growth hills for U.S. states, 60 National Tax Journal 193-204 (2007).

U.S. states

Negative

Taxes directed towards public investments first add then subtract from GDP.

11

Young Lee & Roger Gordon, Tax Structure and Economic Growth, 89 Journal of Public Economics 1027-1043 (2005).

70 countries (1980 - 1997, cross-sectional and 5 year panels)

Negative

Reducing corporate income tax 1 percentage point raises annual growth by 0.1 to 0.2 points.

12

Randall Holcombe & Donald Lacombe, The effect of state income taxation on per capita income growth, 32 Public Finance Review 292-312 (2004).

Counties separated by state borders (1960 to 1990)

Negative

States that raised income taxes averaged a 3.4% reduction in per capita income.

13

Marc Tomljanovich, The role of state fiscal policy in state economic growth, 22 Contemporary Economic Policy 318-330 (2004).

U.S. states (1972 to 1998, multi-year panels)

Negative

Higher tax rates negatively affect short run growth, but not long run growth.

14

Olivier Blanchard & Robert Perotti, An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output, 107 Quarterly Journal of Economics 1329-1368 (2002).

U.S. Post-WWII (VAR/event study)

Negative

Positive tax shocks, or unexpected increases in total revenue, negatively affect private investment and GDP.

15

F. Padovano & E. Galli, E., Tax rates and economic growth in the OECD countries (1950-1990), 39 Economic Inquiry 44-57 (2001).

23 OECD countries (1951 to 1990)

Negative

Effective marginal income tax rates negatively correlated with GDP growth.

16

Stefan Folster & Magnus Henrekson, Growth effects of government expenditure and taxation in rich countries, 45 European Economic Review 1501-1520 (2001).

Rich countries (1970 to 1995)

Negative

Tax revenue as a share of GDP negatively correlated with GDP growth.

17

M. Bleaney, N. Gemmell & R. Kneller, Testing the endogenous growth model: public expenditure, taxation, and growth over the long run, 34 Canadian Journal of Economics 36-57 (2001).

OECD countries (1970 to 1995)

Negative

Distortionary taxes reduce GDP growth. Consumption taxes are not distortionary.

18

R. Kneller, M. Bleaney & N. Gemmell, Fiscal Policy and Growth: Evidence from OECD Countries, 74 Journal of Public Economics 171-190 (1999).

OECD countries (1970 to 1995)

Negative

Distortionary taxes reduce GDP growth.

19

Howard Chernick, Tax progressivity and state economic performance, 11 Economic Development Quarterly 249-267 (1997).

U.S. states (1977 to 1993)

Negative

Progressivity of income taxes negatively affects GDP growth.

20

Enrique Mendoza, G. Milesi-Ferretti, & P. Asea, On the Effectiveness of Tax Policy in Altering Long-Run Growth: Harberger’s Superneutrality Conjecture, 66 Journal of Public Economics 99-126 (1997).

18 OECD countries (1965-1991, 5 year panels)

None

Estimated effective tax rates on labor and capital harm
investment, but effect on growth is insignificant. Effective consumption
taxes increase investment, but not growth. Overall tax burden levels
have no effect on investment or growth.

21

Stephen Miller & Frank Russek, Fiscal structures and economic growth: international evidence, 35 Economic Inquiry 603-613 (1997).

Developed and developing countries

Negative

Tax-financed spending reduces growth in developed countries, increases growth in developing countries.

22

John Mullen & Martin Williams, Marginal tax rates and state economic growth, 24 Regional Science and Urban Economics 687-705 (1994).

U.S. states (1969 to 1986)

Negative

Higher marginal tax rates reduce GDP growth.

23

William Easterly & S. Rebelo, Fiscal Policy and Economic Growth: An Empirical Investigation, 32 Journal of Monetary Economics 417-458 (1993).

Developed and developing countries

None

Effects of taxation difficult to isolate empirically.

24

Reinhard Koester & Roger Kormendi, Taxation, Aggregate Activity and Economic Growth: Cross-Country Evidence on Some Supply-Side Hypotheses, 27 Economic Inquiry 367-86 (1989).

63 countries

Negative

Controlling for average tax rates, increases in marginal tax rates reduce economic activity. Progressivity reduces growth.

25

Jay Helms, The effect of state and local taxes on economic growth: a time series-cross section approach, 67 Review of Economics and Statistics 574-582 (1985).

U.S. states (1965 to 1979)

Negative

Revenue used to fund transfer payments retards growth.

26

Claudio J. Katz, Vincent A. Mahler & Michael G. Franz, The impact of taxes on growth and distribution in developed capitalist countries: a cross-national study, 77 American Political Science Review 871-886 (1983).

22 developed countries

None

Taxes reduce saving but not growth or investment.

We are also threatened with a fiscal cliff that would give us the
highest dividend rate and nearly the highest capital gains rate in the
industrialized world. Most studies do not look separately at
shareholder taxes, due to the fact that they raise relatively little
revenue and many countries have no such taxes.[30]
However, shareholder taxes represent additional, double taxes on
corporate income and therefore have the same type of detrimental effects
on investment and economic growth that are now widely attributed to
corporate taxes.

The fiscal cliff would also push the top marginal rate on personal
income to over 50 percent in some states, such as California, Hawaii,
and New York—higher than all but a few of our trading partners.[31]
We already have the most progressive tax system in the industrialized
world, according to the OECD, and this would make it more so. The OECD
finds such steeply progressive taxation reduces productivity and
economic growth.[32]
Further, the U.S. is unique in that a majority of businesses and
business income are taxed under these progressive individual rates,
businesses such as sole-proprietorships, partnerships, and S
corporations.[33]
One study finds that increasing the average income tax rate by 1
percentage point reduces real GDP per capita by 1.4 percent in the first
quarter and by up to 1.8 percent after three quarters.[34]

In sum, the U.S. tax system is a drag on the economy. Pro-growth tax
reform that reduces the burden of corporate and personal income taxes
would generate a more robust economic recovery and put the U.S. on a
higher growth trajectory, with more investment, more employment, higher
wages, and a higher standard of living.

Conclusion

This review of empirical studies of taxes and economic growth
indicates that there are not a lot of dissenting opinions coming from
peer-reviewed academic journals. More and more, the consensus among
experts is that taxes on corporate and personal income are particularly
harmful to economic growth, with consumption and property taxes less so.
This is because economic growth ultimately comes from production,
innovation, and risk-taking.

This review of empirical studies also establishes some standards by
which a tax system may be judged. If we apply these standards to our
national tax system, the U.S. has probably the most inefficient tax mix
in the developed world. We have the highest corporate tax rate in the
industrialized world. If it came down 10 points—still higher than most
of our trading partners—it would add 1 to 2 points to GDP growth and
likely not lose tax revenue, because the tax base would expand from
in-flows of foreign capital as well increased domestic investment,
hiring, and work effort. The preponderance of evidence is such that
virtually everyone agrees that the corporate rate should come down,
although many continue to claim, opposite the evidence,[29] that such a move would lose revenue.

Ferede and Dahlby update and confirm the results of Lee and Gordon,
using data on statutory tax rates in the Canadian provinces over the
period 1977 to 2006, averaging over five year periods.[25]
Similar to Lee and Gordon, they find cutting the corporate rate by 10
points raises the annual per capita growth rate by 1 to 2 points. The
authors note that this is a temporary boost, as their specification is
based on a Neo-classical growth model which eventually returns to a
steady state rate of growth determined by technological change. However,
long-run output is “substantially increased.” They also find no
significant relationship between personal income tax rates and growth
when controlling for provincial fixed effects. Non-intuitively, they
find raising the sales tax rate increases growth, apparently because it
tends to replace taxes on investment. While most growth studies compare
countries, Ferede and Dahlby argue that subnational state comparisons
make it easier to identify the effects of taxes on growth since states
are more similar than nations. Canadian provinces also use similar tax
bases, unlike many countries.

Finally, Gemmell et al. use a data set covering seventeen OECD countries between the early 1970s and 2004.[26]
They relate economic growth to major fiscal variables, including:
“distortionary” taxes, which are taxes on income and profit;
“non-distortionary” taxes, which are taxes on goods and services;
productive expenditures (e.g., public investments); unproductive
expenditures (e.g., transfer payments); and deficits.[27]
They find that distortionary taxes are most damaging to economic growth
over the long run, followed by deficits, and non-distortionary taxes.
As they state, “distortionary and other taxes have more damaging effects
on growth than deficits so that simultaneously reducing the latter and
raising these taxes is bad for growth in net terms.”[28] They also find that the long run adjustment to fiscal policy occurs in a relatively short period of a few years.

Barro and Redlick construct a time series of average marginal income
tax rates (AMTR) from 1912 (one year prior to the advent of the federal
income tax) to 2006, including federal and state income taxes as well as
the social security payroll tax on employers and employees.[22]
To do this, they bring many sources of data together, including IRS
data and the National Bureau of Economic Research TAXSIM program, which
calculates average marginal tax rates and accounts for numerous
complexities, such as the alternative minimum tax, earned income tax
credit, phase outs of exemptions and deductions, and the deductibility
of state income taxes.[23]
They estimate the effect of annual changes in the AMTR on the following
year’s per capita GDP growth, controlling for changes in defense
spending as well as unemployment and credit conditions. They find that a
cut in the average marginal tax rate of 1 percentage point raises next
year’s per capita GDP by around 0.5 percent. In terms of multipliers,
the tax multiplier is -1.1 while the defense spending multiplier ranges
from 0.4 to 0.8. This implies that defense spending financed by
additional tax revenue reduces GDP.

Lee and Gordon look at seventy countries over the period 1980 to 1997
and find corporate taxes are robustly associated with lower economic
growth, while other taxes do not have a robust statistical association.[24]
In their baseline cross-sectional growth regressions, they find that a
cut in the statutory corporate rate of 10 points raises annual GDP
growth per capita by about 0.7 to 1.1 points. The high end of these
estimates comes from the use of instrumental variables to control for
reverse causality (economic growth causing changes in tax rates). The
authors also estimate the effects using panel data, which includes the
variation over time as well as across countries, providing many more
observations. Rather than using year by year variation, the authors
average over five year periods, so as to smooth out business cycle
effects and account for longer term effects of the variables. For the
panel data they use ordinary least squares (OLS) regression as well as a
fixed effects model that controls for country-specific factors. Their
results suggest that a cut in the corporate rate of 10 points would
raise annual GDP growth per capita by about 0.6 to 1.8 points. Again,
the high end of these estimates comes from the use of instrumental
variables. Specifically, they use neighboring tax rates as an
instrumental variable to control for the effect of local economic growth
on local tax rates. Lee and Gordon also provide some evidence that
corporate taxes reduce growth by reducing entrepreneurial activity.

In a series of OECD working papers,[14] summarized by Arnold et al.,[15]
OECD affiliated economists have determined a ranking of the most
harmful taxes for economic growth. They find that corporate taxes are
the most harmful, followed by personal income taxes, consumption taxes,
and, finally, property taxes, particularly property taxes levied on
households rather than corporations. They look at twenty-one OECD
countries from 1971 to 2004 and control for various factors including
measures of physical and human capital accumulation, population growth,
and time and country specific effects. They also control for the overall
tax burden in each country as a share of GDP. This allows them to
isolate the effect of different types of taxes based on the share of tax
revenue that comes from each tax on a revenue- and spending-neutral
basis.[16]
They find that a 1 percent shift of tax revenues from income taxes
(both personal and corporate) to consumption and property taxes would
increase GDP per capita by between 0.25 percent and 1 percent in the
long run. They also find progressivity of personal income taxes reduces
economic growth.[17] The authors find further support for their results by looking at industry[18] and firm level[19]
measures of investment and productivity growth. They find corporate
taxes, both in terms of the statutory tax rate and depreciation
allowances, reduce investment and productivity growth. They also find
that raising the top marginal rate on personal income reduces
productivity growth, stating that “a reduction in the top marginal
[individual] tax rate is found to raise productivity in industries with
potentially high rates of enterprise creation. Thus reducing top
marginal tax rates may help to enhance economy-wide productivity in OECD
countries with a large share of such industries….” [20] The U.S. is one such country with a large share of entrepreneurship and non-corporate businesses.[21]

Mertens and Ravn do a Romer-style narrative analysis of post-war tax
changes in the U.S. but also distinguish between personal and corporate
income taxes.[13]
They find that personal income tax cuts more immediately boost GDP but
lose revenue, while corporate tax cuts generate growth in the long run
and expand the tax base such that revenues are unchanged. Particularly,
they find a 1 percentage point cut in the average personal income tax
rate raises real GDP per capita by 1.4 percent in the first quarter and
by up to 1.8 percent after three quarters. They find a 1 percentage
point cut in the average corporate income tax rate raises real GDP per
capita by 0.4 percent in the first quarter and by 0.6 percent after one
year. The effect of the corporate tax is actually larger per dollar of
revenue than that of the personal income tax, since the corporate tax
raises about one-quarter of the revenue that the personal income tax
does. In terms of “multipliers,” i.e. how revenue or spending changes
affect GDP, their estimates of tax multipliers exceed most estimates of
spending multipliers.

My analysis suggests that tax policies take time to work its
full effects on the economy. When the specification is sufficiently
general to pick up these effects, a negative relationship between taxes
and income growth emerges.[10]

Reed’s is a thorough analysis with numerous robustness checks.
However, the tax burden measure does not include federal taxes, the
burden of which is twice as large as the burden of state and local
taxes. Also, the federal burden is extremely progressive, such that
taxpayers in high income states face a much larger federal tax burden
than do taxpayers in low income states.[11]

As mentioned, most recent studies distinguish between different types
of taxes on the basis that they have different effects on the economy.
Corporate and shareholder taxes should mainly affect investment and
capital formation, while income taxes affect labor and saving by
individuals as well as investment by non-corporate business owners.[12]
Consumption taxes, such as sales taxes, affect suppliers of labor and
capital, but neutrally. Corporate and personal income taxes are not
neutral, as they represent essentially additional, double taxes on
future consumption. These empirical studies typically find that
corporate and personal income taxes are the most damaging to economic
growth, followed by consumption taxes and property taxes.

Another set of studies looks at episodes of fiscal consolidation
(efforts to reduce deficits) and fiscal stimuli and in the process
estimate how tax policy affects economic growth. Alesina and Ardagna
cover a large number of such episodes occurring in OECD countries
between 1970 and 2006.[6]
They find that fiscal stimuli based upon tax cuts are more likely to
increase growth than those based upon spending increases. Also, fiscal
consolidations based upon spending cuts and no tax increases are more
likely to succeed at reducing deficits and debt and less likely to
create recessions as compared to fiscal consolidations based upon tax
increases. Similarly, the IMF analyzes 170 cases of fiscal consolidation
in fifteen advanced countries over the last thirty years and finds that
spending cuts are much less damaging to short term growth than are tax
increases.[7]
They find a 1 percent spending cut has no significant effect on growth,
whereas a 1 percent tax increase reduces GDP by 1.3 percent after two
years. Fiscal consolidation studies by Goldman Sachs and others come to
similar conclusions.[8]

A number of researchers have looked at taxes and growth in U.S. states, but one of the most thorough and robust is by Reed.[9]
He uses panel data, taking advantage of variation in taxes and growth
across U.S. states and over time, averaging over five year periods
between 1970 and 1999. He finds a robust negative effect of the tax
burden on economic growth, where the tax burden is defined as the ratio
of state and local tax revenues to personal income. He finds this result
is robust for both “contemporaneous” changes in the tax burden, i.e.,
within the five year period, and the initial level of the tax burden.
When he runs the same specification using annual data, he finds the
contemporaneous effect is actually positive, while the lagged effects
from tax burden changes in the four prior years are all negative. He
argues that annual data, at least at the state level, suffers from
measurement error and misspecification of lagged effects and may prevent
findings of a robust relationship between taxes and growth:

Literature Review

Nearly every empirical study of taxes and economic growth published
in a peer reviewed academic journal finds that tax increases harm
economic growth. In my review, I examine twenty-six such studies going
back to 1983, as shown in Table 1. All but three of those studies, and
every study in the last fifteen years, find a negative effect of taxes
on growth. The table shows summaries of each study’s findings, but the
most recent and influential studies will be discussed here in more
detail.

Most of the recent studies distinguish by type of tax, rather than
using some broad measure of taxes. The most prominent exception is by
David and Christina Romer,[5]
who look at the overall U.S. federal tax burden as a share of GDP since
World War II. They analyze the narrative record of federal tax changes,
including presidential speeches, congressional reports, etc., to
identify legislated “tax shocks,” such as efforts to reduce an inherited
budget deficit or promote long-run growth. This technique allows them
to minimize the statistical problem of reverse causality by removing
from analysis legislated tax changes that are the result of economic
changes, such as countercyclical actions and those tied to government
spending. They find much larger negative effects of taxes as compared to
earlier studies that lump all tax changes together. Particularly, they
find that a tax increase of 1 percent of GDP lowers real GDP by about 3
percent after about two years. The largest effect is from tax changes
meant to promote economic growth, and the main channel is investment.
These results are robust to various specifications, including
controlling for the state of the economy, monetary policy, and the
behavior of government spending.

Some of these items are long-term mechanisms, particularly human and
physical capital formation. Most of these empirical studies focus on the
long-term effects, over a period of five years or more, but many
investigate short-term dynamics as well. The evidence for short-term,
demand-side effects of tax policy is less robust and less compelling,
perhaps owing to the difficulty of disentangling short-term factors and
matching events. However, there is some evidence that longer-term,
supply-side effects occur sooner than previously thought, such as within
the first few years of a policy change.

In any case, the lesson from the studies conducted is that long-term
economic growth is to a significant degree a function of tax policy. Our
current economic doldrums are the result of many factors, but having
the highest corporate rate in the industrialized world does not help.
Nor does the prospect of higher taxes on shareholders and workers. If we
intend to spur investment, we should lower taxes on the earnings of
capital. If we intend to increase employment, we should lower taxes on
workers and the businesses that hire them.

These results support the Neo-classical view that income and wealth must
first be produced and then consumed, meaning that taxes on the factors
of production, i.e., capital and labor, are particularly disruptive of
wealth creation. Corporate and shareholder taxes reduce the incentive to
invest and to build capital. Less investment means fewer productive
workers and correspondingly lower wages. Taxes on income and wages
reduce the incentive to work. Progressive income taxes, where higher
income is taxed at higher rates, reduce the returns to education, since
high incomes are associated with high levels of education, and so reduce
the incentive to build human capital. Progressive taxation also reduces
investment, risk taking, and entrepreneurial activity since a
disproportionately large share of these activities is done by high
income earners.[4]

So what does the academic literature say about the empirical
relationship between taxes and economic growth? While there are a
variety of methods and data sources, the results consistently point to
significant negative effects of taxes on economic growth even after
controlling for various other factors such as government spending,
business cycle conditions, and monetary policy. In this review of the
literature, I find twenty-six such studies going back to 1983, and all
but three of those studies, and every study in the last fifteen years,
find a negative effect of taxes on growth. Of those studies that
distinguish between types of taxes, corporate income taxes are found to
be most harmful, followed by personal income taxes, consumption taxes
and property taxes.

For instance, the Congressional Research Service (CRS) has found support
for the theory that taxes have no effect on economic growth by looking
at the U.S. experience since World War II and the dramatic variation in
the statutory top marginal rate on individual income.[1] They find the fastest economic growth occurred in the 1950s when the top rate was more than ninety percent.[2]
However, their study ignores the most basic problems with this sort of
statistical analysis, including: the variation in the tax base to which
the individual income tax applies; the variation in other taxes,
particularly the corporate tax; the short-term versus long-term effects
of tax policy; and reverse causality, whereby economic growth affects
tax rates. These problems are all well known in the academic literature
and have been dealt with in various ways, making the CRS study
unpublishable in any peer-reviewed academic journal.[3]

What Is the Evidence on Taxes and Growth?

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December 18, 2012

By

William McBride

(PDF) Special Report No. 207: What Is the Evidence on Taxes and Growth?
Introduction

The idea that taxes affect economic growth has become politically
contentious and the subject of much debate in the press and among
advocacy groups. That is in part because there are competing theories
about what drives economic growth. Some subscribe to Keynesian,
demand-side factors, others Neo-classical, supply-side factors, while
yet others subscribe to some mixture of the two or something entirely
unique. The facts, historical and geographical variation in key
parameters for example, should shed light on the debate. However, the
economy is sufficiently complex that virtually any theory can find some
support in the data.

A man of his responsibility, being finance minister and all, ought not be explaining his tax policy to a reporter. I know all about direct and indirect taxes. I also know tax forgivance to a certain section of society. Taxes are spread all over that must be paid, whether you like it or not. Pity that readers has to learn from the last man of the earth, Mr Arun Jaitley.
Saving BJP constituency is the goal. Why talk about taxes now? Budget is not due till next February? State elections. That's why. Nasty politicians, nasty strategy and their vulgar description of citizen's duty (not) to pay due tax.

I would fire him for his damned silly little talk-talk.

...and I am Sid Harth

First of all, Tax research of US and Canada won't work for India. We are a completely different market. Even there is difference in US and Canada. Canada has Income tax for most people except the very poor. This is because Canada has a huge social spending program. US has comparatively less Income tax rate though the rich there pay less which has been a major catalyst of Occupy Wall Street. Hell even many CEOs admit that in US the tax for rich should be increased. As for as FM announcing tax break, it is necessary. If you know economics well rather than just copy-pasting other people's research, in economics correct policy are required but equally important is the promotion and public awareness of those policy or else how will people know and this creates positive sentiments.

A sensible sentiment. Quite contrary to the one an earlier FM has - which was, I will change the rules of the game (after fairly and comprehensively losing the game) like a spoilt brat with an indulgent father.

The delicious irony is: the same past FM will have to swallow his pride and sign the repeal of that piece of terrorism!

Ahhh... life is a f-itch!