Abstract
While the public has noticed the need for the detection of potential tax loopholes and demands further improvement in the taxation of banks, there is scarce empirical evidence whether banks’ degree of tax avoidance actually differs from that of non-banks. We try to close this gap by investigating U.S. banks’ tax avoidance behavior for a sample period from 2004 to 2016. To identify banks’ tax avoidance, we use annual Cash ETRs and GAAP ETRs and compare them to the tax avoidance behavior of non-banks. As there are various channels of tax avoidance, we account for differences in several areas such as corporate fundamentals, the degree of multinationality and regulatory scrutiny. We provide cautious evidence that banks have significantly higher Cash ETRs than non-banks. Using quantile regression, we find evidence that the assocation between banks and ETRs is not constant over the whole tax avoidance distribution, with banks reporting significantly higher ETRs compared to nonbanks in those regions of the tax avoidance distribution which are regularly classified as “high tax avoidance”. In line with recent research, we provide some evidence that the difference in Cash ETRs between banks and non-banks is more pronounced for worse-capitalized, than for better-capitalized banks.
Highlights
In this study we assess whether the overall degree of tax avoidance of banks1 is comparable to that of non-banks2 and whether we observe differences in frequently used tax avoidance variables
Graphical evidence suggests that averaged over the sample period banks’ Cash ETR and GAAP ETR in Figure 1 are somewhere in the middle range of the tax avoidance distribution when measured in GAAP ETR terms and at the highest end when measured in Cash ETR terms
This is surprising as in comparison to non-banks and other financial institutions we see that GAAP ETRs are always higher in magnitude than Cash ETRs
Summary
In this study we assess whether the overall degree of tax avoidance of banks is comparable to that of non-banks (holding all else constant) and whether we observe differences in frequently used tax avoidance variables (letting variables differ between bank and non-bank). Due to the fact of supervision and regulation, banks might be less inclined to engage in aggressive or risky tax avoidance (like aggressive profit or debt shifting) compared to non-banks. Opposed to this scenario, banks strive, within their bounderies, to increase after-tax cash flows. In economic terms this effect amounts to 16 % or rather 20 % of mean Cash ETR Another important finding, is that average inferences of how tax avoidance variables (in terms of magnitude) are associated with ETRs once banks and non-banks are combined in a joint sample do not strongly differ from average inferences of a separate non-bank sample. To assess whether tax avoidance variables are differently associated with ETRs for banks and non-banks, we use interactions to analyze incremental effects.
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