Using the Linear Cash Taxes Paid Model in Accounting Research: Developing a Tax Model That Permits the Inclusion of Loss-Years

Abstract

Accounting tax researchers generally do not use a linear tax function to test for corporate tax avoidance. Stemming from the cash ETR function from Edwards, Kubata, and Shevlin (2021) we develop the linear cash taxes paid model where cash taxes paid are regressed on an intercept and pretax income. We find that U.S. MNEs achieve greater levels of tax avoidance with regards to taxes that are a function of current pretax income; whereas, U.S. domestic corporations achieve greater levels of tax avoidance with regards to taxes that are independent of current pretax income arising from book-tax differences. Overall, our findings complement the findings of Edwards et al. (2021), Lampenius, Shevlin, and Stenzel (2021), and answers the call for the inclusion of loss years when analyzing corporate tax avoidance (Hanlon and Heitzman 2010).