Tax accounting choice: The costs of corporate tax aggressiveness

This study investigates corporate tax aggressiveness by experimentally examining whether differences in book and tax accounting methods, which are disclosed in corporate income tax returns, influence decisions to adopt aggressive tax positions. Moreover, given that a firm has adopted an aggressive tax position, this study examines whether the firms will reserve the financial tax benefit on the balance sheet. An experimental instrument was sent to corporate tax directors of U.S. firms. The manipulation in the experimental instrument was whether an aggressive tax position in a hypothetical scenario would [not] conform to the firm's financial accounting method. The tax directors indicated on the instrument how strongly they would recommend adopting the tax position in the scenario, and then assuming the tax position was adopted, how strongly they would recommend expensing or reserving the financial tax benefit.; Empirical tests indicate that subjects more strongly recommend adopting a conforming tax position than a nonconforming one. However, no relationship is found between the size of firms' book-tax differences, used to proxy for the size of firms' portfolio of aggressive tax positions, and their subsequent tax decisions. Tests of subjects' propensity to reserve the tax benefit indicate that conforming positions are less likely than nonconforming positions to be reserved, and public firms are more likely to reserve a tax cushion than private firms. Moreover, as aggressive tax portfolios increase, firms presented with a nonconforming tax opportunity were less likely to reserve the financial tax benefit than firms presented with a conforming tax opportunity.; This work extends the previous literature by directly examining firms' tax accounting choices as opposed to their financial accounting choices. Additionally, this paper tests the findings of several analytical works on tax accounting choices. While prior research has speculated that firms reserve tax cushions, this paper directly examines tax cushions and the factors that influence them.