| The Economic Recovery Tax Act of 1981 liberalized the tax code allowing a significant number of U.S. firms to systematically avoid federal income taxes while other firms paid their fair share during the 1982-1985 time period. The objective of this study is to document the determinants of corporate tax avoidance behavior.; This study developed hypotheses from the accounting choice literature to try to explain managerial decisions to avoid federal income tax. Seven firm specific variables were chosen either on the basis of their economic implications for tax avoidance behavior or because they proxy for the hypotheses developed in this study.; The statistical results support the debt covenant, bonus plan, and political action committee hypotheses. Support is not provided for the political cost, ownership control, and capital intensity hypotheses.; Based on these findings, the profile of a tax avoiding firm is a large firm, with a high debt to equity ratio, a bonus plan based on after-tax accounting earnings which gives a larger share of earnings to political action committees that are specifically established to contribute funds to members of the tax writing committees of Congress. The ownership percentage of voting stock held by directors and officers shows no relationship to tax avoidance behavior providing empirical evidence to support Fama's labor market efficiency theory. Finally, capital intensity does not explain tax avoidance. This result failed to support the theory behind the investment tax credit.; Implications for changes in the national tax policy are provided in the thesis along with potential new accounting issues worth exploring. |
