Empirical evidence on the impact of recent Korean tax reforms
-
DOIhttp://dx.doi.org/10.21511/imfi.15(4).2018.03
-
Article InfoVolume 15 2018, Issue #4, pp. 35-47
- Cited by
- 1801 Views
-
221 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
In 2011, Korea required all firms to report all value added tax (VAT) invoices electronically to tax authorities. This unique law provided a natural experiment to examine the effects of this disclosure on income taxes and firms’ related responses. The authors find that this additional required disclosure caused firms to become less aggressive on their income taxes, and that they were unable to pass increased tax burdens forward to consumers or backward to suppliers and labor. To maintain, profitability firms cut research and development (R&D) costs, and this cost cutting was larger for tax aggressive firms. Policy implications of this unintended result are discussed.
- Keywords
-
JEL Classification (Paper profile tab)M41, H26
-
References44
-
Tables6
-
Figures0
-
- Table 1. Industry distribution of the sample
- Table 2. Descriptive statistics
- Table 3. Correlations
- Table 4. Change in taxes after law change
- Table 5. Regression results for tax shifting
- Table 6. Regression results for R&D investment
-
- Almeida, H., & Campello, M. (2007). Financial Constraints, Asset Tangibility, and Corporate Investment. Review of Financial Studies, 20(5), 1429-1460.
- Almeida, H., Campello, M., & Weisbach, M. S. (2004). The cash flow sensitivity of cash. The Journal of Finance, 59, 1777-1804.
- Ayers, B., Laplante, S., & Schwab, C. (2011). Does tax deferral enhance firm value? (Working Paper). University of Georgia.
- Blanchard, O. J., Lopez-de- Silanes, F., & Shleifer, A. (1994). What do firms do with cash windfalls? Journal of Financial Economics, 36(3), 337-360.
- Blaylock, B. (2016). Is tax avoidance associated with economically significant rent extraction among U.S. firms? Contemporary Accounting Research, 33(3), 1013-1043.
- Blouin, J., Devereux, M., & Shackelford, D. (2012). Investment, Tax Uncertainty, and Aggressive Tax Avoidance (Working paper).
- Boyle, G. W., & Guthrie, G. A. (2003). Investment, uncertainty, and liquidity. The Journal of Finance, 58, 2143-2166.
- Brondolo, J. (2009). Collecting Taxes During An Economic Crisis: Challenges and Policy Options. IMF staff position note (SPN/09/17), 1-38.
- Campello, M., Giambona, E., Graham, J., & Harvey, C. (2011). Liquidity management and corporate investment during a financial crisis. Review of Financial Studies, 26, 1944-1979.
- Campello, M., Giambona, E., Graham, J., & Harvey, C. (2012). Access to liquidity and corporate investment in Europe during the financial crisis. Review of Finance, 16(2), 323-346.
- Campello, M., Graham, J., & Harvey, C. (2010). The real effects of financial constraints: Evidence from a financial crisis. Journal of Finance and Economics, 97(3), 470-487.
- Chen, S., Chen, X., Cheng, Q., & Shevlin, T. (2010). Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95(1), 41-61.
- Croce, M., Kung, H, Nguyen, T., & Schmid, L. (2012). Fiscal Policies and Asset Prices. The Review of Financial Studies, 25(9), 2635- 2672.
- Dechow, P., & Dichev, I. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77, 35-59.
- Dechow, P. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18(1), 3-42.
- Dechow, P., Kothari, S. P., & Watts, R. L. (1998). The relation between earnings and cash flows. Journal of Accounting and Economics, 25, 133-168.
- Desai, M. A., & Daharmapala, D. (2006). Corporate Tax Avoidance and High Powered Incentive. Journal of Financial Economics, 79(1), 145-179.
- Dhaliwal, D., Gleason, C., & Mills, L. (2004). Last-chance earnings management: using the tax expense to meet analysts’ forecasts. Contemporary Accounting Research, 21(2), 431-459.
- Edwards, A., Kravet, T., & Wilson, R. (2016). Trapped cash and the profitability of foreign acquisitions. Contemporary Accounting Research, 33(1), 44-77.
- Edwards, A., Schwab, C., & Shevlin, T. (2013). Financial constraints and the incentive for tax planning (Working Paper). University of Toronto, University of Georgia and University of California at Irvine.
- Fazzari, S. M., Hubbard, R. G., & Petersen, B. C. (1988). Financing Constraints and Corporate Investment. Brookings Papers on Economic Activity, 1, 141-206.
- Graham, J. R., Lemmon, M., & Schallheim, J. (1998). Debt, leases, Taxes, and the endogeneity of corporate tax status. Journal of Finance, 53, 131-162.
- Gravelle, J. (2010). Corporate tax incidence: review of general equilibrium estimates and analysis. Congressional Budget Office.
- Green, D. H., & Kerr, J. N. (2016). How do firms use cash tax savings: A cross-country analysis (Working Paper).
- Greve, H. R. (2003). A behavioral theory of R&D expenditures and innovations: Evidence from shipbuilding. Academic Management Journal, 46, 685-702.
- Gupta, S., & Newberry, K. (1997). Determinants of the variability in corporate effective tax rates: evidence from longitudinal data. Journal of Accounting and Public Policy, 16(1), 1-34.
- Hanlon, M., Lester R., & Verdi, R. (2015). The effect of repatriation tax cost on U.S. multinational investment. Journal of Financial Economics, 116(1), 179-196.
- Hassett, K., & Metcalf, G. (1999). Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment? The Economic Journal, 109, 372-393.
- Hirth, S., & Viswanatha, M. (2011). Financing constraints, cash-flow risk, and corporate investment. Journal of Corporate Finance, 17, 1496-1509.
- Hribar, P., & Collins, D. (2002). Errors in estimating accruals: Implications for empirical research. Journal of Accounting Research, 40(1), 105-134.
- Keefe, M. O., & Tate, J. (2013). Is the relationship between investment and conditional cash flow volatility ambiguous, asymmetric or both? Accounting and Finance, 53(4), 913-947.
- Lamont, O. (1997). Cash Flow and Investment: Evidence from Internal Capital Markets. Journal of Finance, 52(1), 83-109.
- Lee, P. M., & O’Neill, H. M. (2003). Ownership structures and R&D investments of U.S. and Japanese firms: Agency and stewardship perspectives. Academy of Management Journal, 46(2), 212-225.
- Minton, B. A., & Schrand, C. (1999). The Impact of Cash Flow Volatility on Discretionary Investment and the Costs of Debt and Equity Financing. Journal of Financial Economics, 54(3), 423-460.
- Niemann, R. (2011). The Impact of Tax Uncertainty on Irreversible Investment. Review of Management Science, 5, 1-17.
- Rego, S. O. (2003). Tax-avoidance activities of U.S. multinational firms. Contemporary Accounting Research, 20(4), 805-833.
- Rice, E. (1992). The corporate tax gap: Evidence on tax compliance by small corporations. In J. Slemrod (Ed.), Why People Pay Taxes (pp. 125-161). Ann Arbor: University of Michigan Press.
- Shehata, M. (1991). Self- Selection Bias and the Economic Consequences of Accounting Regulation: An Application of Two-Stage Switching Regression to SFAS No. 2. The Accounting Review, 66(4), 768-787.
- Siegfried, J. (1974). Effective average U. S. corporate income tax rate. National Tax Journal, 27(2), 245-259.
- Slemrod, J. (2001). A general model of the behavioral response to taxation. Int. Tax Public Finance, 8(2), 119-128.
- Stein, J. C. (2003). Agency, information and corporate investment. In G. M. Constantinides, M. Harris & R. M. Stulz (Eds.), Handbook of the Economics of Finance 1(1), Chapter 2 (pp. 111-165). North- Holland, Amsterdam: Elsevier.
- Stokey, N. L. (2013). Wait-and See: Uncertainty and Investment Options (Working paper).
- Tobin, J. (1969). A General Equilibrium Approach to Monetary Theory. Journal of Money, Credit & Banking, 1(1), 15-29.
- Watts, R. L., & Zimmerman, J. L. (1986). Positive Accounting Theory. Englewood Cliffs, NJ: Prentice-Hall.