Investments in Tax Planning

Mills, Lillian; Erickson, Merle M.; Maydew, Edward L.
March 1998
Journal of the American Taxation Association;Spring98, Vol. 20 Issue 1, p1
Academic Journal
This paper analyzes investments in tax planning. The literature is replete with examples of specific tax-planning strategies. However, little Is known about how firms invest in tax planning to develop these strategies or the firm-wide returns to investments in tax planning. We use data from a confidential survey by Slemrod and Blumenthal (1993) in which 365 large U.S. corporations shared data on their tax-related expenditures. We find that: (1) planning costs (as a percentage of selling, general and administrative expenses (SG&A)) decrease in firm size; (2) firms with foreign operations invest more heavily in tax planning; (3) capital intensity and number of legal entities are positively related to tax-planning costs; and (4) inventory intensity and leverage are unrelated to tax-planning costs. Finally, our estimates indicate a negative relation between investments in tax planning and tax liabilities. On average, an additional $1 investment in tax planning results in a $4 reduction in tax liabilities; This relation holds over specifications with and without industry controls, within the manufacturing industry alone, and in the presence of controls for tax-planning opportunities, although the magnitude does vary.


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