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John R Graham - One of the best experts on this subject based on the ideXlab platform.
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Tax Rates and corpoRate decision making
Social Science Research Network, 2017Co-Authors: John R Graham, Michelle Hanlon, Terry Shevlin, Nemit ShroffAbstract:We survey companies and find that many use incorrect Tax Rate inputs into important corpoRate decisions. Specifically, many companies use an average Tax Rate (the GAAP effective Tax Rate, ETR) to evaluate incremental decisions, rather than using the theoretically correct Marginal Tax Rate. We find evidence consistent with behavioral biases (heuristics, salience) playing a role in these choices. We estimate the economic consequences of using the theoretically incorrect Tax Rate and find that using the ETR for capital structure decisions leads to suboptimal leverage choices and using the ETR in investment decisions makes firms less responsive to investment opportunities.
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using Tax return data to simulate corpoRate Marginal Tax Rates
Journal of Accounting and Economics, 2008Co-Authors: John R Graham, Lillian F MillsAbstract:Abstract We document that simulated corpoRate Marginal Tax Rates based on financial statement data [Shevlin, T., 1990. Estimating corpoRate Marginal Tax Rates with asymmetric Tax treatment of gains and losses. The Journal of the American Taxation Association 11, 51–67; Graham, J., 1996a. Debt and the Marginal Tax Rate. Journal of Financial Economics 41, 41–73] are highly correlated with simulated Rates based on corpoRate Tax return data. We provide algorithms that can be used to estimate the book or Tax simulated Rates when they are not available. We find that the simulated book Marginal Tax Rate does a better job of explaining financial statement debt ratios than does the analogous Tax return variable and discuss how the book-simulated Rate is likely to be an appropriate measure in settings with global, long-term considerations.
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using Tax return data to simulate corpoRate Marginal Tax Rates
Research Papers in Economics, 2007Co-Authors: John R Graham, Lillian F MillsAbstract:We document that simulated corpoRate Marginal Tax Rates based on financial statement data (Shevlin 1990 and Graham 1996a) are highly correlated with simulated Rates based on corpoRate Tax return data. We provide algorithms that can be used to estimate the book or Tax simulated Rates when they are not available. We find that the simulated book Marginal Tax Rate does a better job of explaining financial statement debt ratios than does the analogous Tax return variable and discuss how the book simulated Rate is likely to be an appropriate measure in settings with global, long-term considerations.
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employee stock options corpoRate Taxes and debt policy
National Bureau of Economic Research, 2002Co-Authors: Douglas A Shackelford, Mark H. Lang, John R GrahamAbstract:We find that employee stock option deductions lead to large aggregate Tax savings for Nasdaq 100 and S&P 100 firms and also affect corpoRate Marginal Tax Rates. For Nasdaq firms, the median Marginal Tax Rate is 31 percent when option deductions are ignored but falls to 5 percent when one accounts for the deductions. For S&P firms, however, option deductions do not affect Marginal Tax Rates to a large degree. In the spirit of DeAngelo and Masulis (1980), option deductions are important nondebt Tax shields that can affect corpoRate policies. We find evidence consistent with option deductions substituting for interest deductions in corpoRate capital structure decisions. This evidence explains in part why some firms appear to be underlevered.
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debt leases Taxes and the endogeneity of corpoRate Tax status
Journal of Finance, 1998Co-Authors: John R Graham, Michael L Lemmon, James S SchallheimAbstract:We provide evidence that corpoRate Tax status is endogenous to financing decisions, which induces a spurious relation between measures of financial policy and many commonly used Tax proxies. Using a forward-looking estimate of before-financing corpoRate Marginal Tax Rates, we document a negative relation between operating leases and Tax Rates, and a positive relation between debt levels and Tax Rates. This is the first unambiguous evidence supporting the hypothesis that low Tax Rate firms lease more, and have lower debt levels, than high Tax Rate firms. MANY THEORIES OF CAPITAL STRUCTURE imply that, all else equal, the incentive to use debt financing increases with a firm's Marginal Tax Rate due to the Tax deductibility of interest expense (e.g., Modigliani and Miller (1963), DeAngelo and Masulis (1980)). Conversely, leasing models generally predict that firms with low Marginal Tax Rates employ relatively more leases than do firms with high Marginal Tax Rates. The logic behind the leasinlg prediction is that leases allow for the transfer of Tax shields from firms that cannot fully utilize the associated Tax deduction (lessees) to firms that can (lessors) (e.g., Myers, Dill, and Bautista (1976), Smith and Wakeman (1985), Ross, Westerfield, and Jaffe (1996)). Despite these straightforward predictions, empirically testing for Tax effects is difficult because a spurious relation exists between. the financing decision and many commonly used Tax proxies. Specifically, both interest expense and lease payments are Tax deductible. Thus, a firm that finances its operations with debt or leases reduces its Taxable income, potentially lowering its expected Marginal Tax Rate. If not properly addressed, this endogeneity of the Tax Rate can bias an experiment in favor of finding a negative
Michel Strawczynski - One of the best experts on this subject based on the ideXlab platform.
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the optimal asymptotic income Tax Rate
Journal of Public Economic Theory, 2012Co-Authors: Momi Dahan, Michel StrawczynskiAbstract:This paper shows that a policy maker needs only two types of information to set the optimal income Tax Rate at the top: a measure of labor supply elasticity and the shape of skills distribution. We find that the asymptotic Tax Rate is not affected by the degree of inequality aversion as long as the Marginal utility of consumption converges to zero. By using empirically plausible estimates for the compensated labor supply elasticity and the shape of skills distribution, we find that the optimal Marginal Tax Rate at the top should be between 33% and 60%, which is in line with the existing Rates in the real world.
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the optimal asymptotic income Tax Rate
Social Science Research Network, 2007Co-Authors: Momi Dahan, Michel StrawczynskiAbstract:This paper shows that a policy maker needs only two types of information to set the optimal income Tax Rate at the top: the compensated elasticity of labor supply and the shape of income distribution. Unlike recent results in the literature our paper shows that income effects are immaterial for the optimal asymptotic Tax Rate while the degree of non-linearity of the utility of consumption does play a role in determining the asymptotic Rate. By using empirically plausible estimates for the compensated labor supply elasticity and the shape of income distribution, we find that the optimal Marginal Tax Rate at the top should be relatively high, which is in line with the existing Rates in the real world.
Momi Dahan - One of the best experts on this subject based on the ideXlab platform.
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the optimal asymptotic income Tax Rate
Journal of Public Economic Theory, 2012Co-Authors: Momi Dahan, Michel StrawczynskiAbstract:This paper shows that a policy maker needs only two types of information to set the optimal income Tax Rate at the top: a measure of labor supply elasticity and the shape of skills distribution. We find that the asymptotic Tax Rate is not affected by the degree of inequality aversion as long as the Marginal utility of consumption converges to zero. By using empirically plausible estimates for the compensated labor supply elasticity and the shape of skills distribution, we find that the optimal Marginal Tax Rate at the top should be between 33% and 60%, which is in line with the existing Rates in the real world.
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the optimal asymptotic income Tax Rate
Social Science Research Network, 2007Co-Authors: Momi Dahan, Michel StrawczynskiAbstract:This paper shows that a policy maker needs only two types of information to set the optimal income Tax Rate at the top: the compensated elasticity of labor supply and the shape of income distribution. Unlike recent results in the literature our paper shows that income effects are immaterial for the optimal asymptotic Tax Rate while the degree of non-linearity of the utility of consumption does play a role in determining the asymptotic Rate. By using empirically plausible estimates for the compensated labor supply elasticity and the shape of income distribution, we find that the optimal Marginal Tax Rate at the top should be relatively high, which is in line with the existing Rates in the real world.
Douglas A Shackelford - One of the best experts on this subject based on the ideXlab platform.
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equity price pressure from the 1998 reduction in the capital gains holding period
Journal of The American Taxation Association, 2002Co-Authors: Jennifer L Blouin, Douglas A Shackelford, Jana Smith RaedyAbstract:This paper provides evidence consistent with shareholders' personal Tax incentives affecting stock prices and trading volume. On June 24, 1998, the Marginal Tax Rate on capital gains was reduced from 28 percent to 20 percent for individual investors holding shares between 12 and 18 months. This study compares firms whose initial public shareholders immediately benefited from the reduction to other IPO firms. The sample of immediately affected firms recorded mean, incremental, one‐day stock price declines of −1.3 percent amid heavy trading. The results are consistent with capital gains Tax planning constraining investment portfolio management. When the constraint was lifted, enough shareholders sold that prices moved. The results imply that despite increasingly liquid capital markets, transaction costs remain large enough to prevent investors from entering the market immediately and fully offsetting downward price pressure from individual capital gains Tax management.
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employee stock options corpoRate Taxes and debt policy
National Bureau of Economic Research, 2002Co-Authors: Douglas A Shackelford, Mark H. Lang, John R GrahamAbstract:We find that employee stock option deductions lead to large aggregate Tax savings for Nasdaq 100 and S&P 100 firms and also affect corpoRate Marginal Tax Rates. For Nasdaq firms, the median Marginal Tax Rate is 31 percent when option deductions are ignored but falls to 5 percent when one accounts for the deductions. For S&P firms, however, option deductions do not affect Marginal Tax Rates to a large degree. In the spirit of DeAngelo and Masulis (1980), option deductions are important nondebt Tax shields that can affect corpoRate policies. We find evidence consistent with option deductions substituting for interest deductions in corpoRate capital structure decisions. This evidence explains in part why some firms appear to be underlevered.
Carol Olson Houston - One of the best experts on this subject based on the ideXlab platform.
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Taxes and the choice of issuing preferred stock vs debt
Journal of The American Taxation Association, 2002Co-Authors: Arthur L Houston, Carol Olson HoustonAbstract:This study provides descriptive evidence on the link between a firm's expected Marginal Tax Rate and its use of preferred stock as an alternative to financing with long‐term debt. Regressions are estimated on a sample of industrial firms that issued preferred stock and a control group, matched on industry and size, that contemporaneously issued long‐term debt. Substantial Tax effects are found for a full sample of firms that issued any type of preferred stock, as well as a large subsample that issued only convertible preferred stock, frequently used to facilitate mergers and acquisitions. For the typical firm, a decrease in its expected Marginal Tax Rate from the 75th to the 25th percentile is associated with a 33 percent increase in the likelihood it will issue preferred stock. This financing behavior is consistent with a goal of enhancing Tax benefits.