Tax Comparability and Corporate Tax Behavior

Abstract

I examine whether taxable income comparability or tax liability comparability affects a firm’s tax behavior. I find that, on average, comparable taxable income deters corporate managers from engaging in aggressive tax planning. I also find that the deterrence effect of taxable income comparability on aggressive tax planning is more pronounced for firms with less IRS attention and a more uncertain information environment. A battery of sensitivity analyses, including alternative comparability and tax planning measures and a difference-in-differences design around an exogenous comparability-increasing shock, confirms that the above findings are robust to both endogeneity and measurement error concerns. My study implies that a more comparable tax return discourages firms’ incentives for aggressive tax planning.