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on Accounting and Auditing |
| By: | Cascino, Stefano; Széles, Máté; Veenman, David |
| Abstract: | Recent studies conclude that CEO debt-like incentives, such as defined benefit pensions and deferred compensation (“inside debt”), improve financial reporting quality. We challenge this result on conceptual grounds and evaluate its sensitivity to empirical specification. We reexamine the relation between accrual-based measures of financial reporting quality and CEO inside debt variables and find that it is an artifact of correlated omitted factors that prior studies do not effectively control for. Specifically, we show that the relation disappears when we control for factors related to the volatility and uncertainty of firms’ operating environments. Using a two-step approach, we illustrate how the relation between inside debt and accrual-based financial reporting quality measures is driven entirely by the portion of inside debt that is correlated with these factors, rather than a direct effect of inside debt itself. Our findings challenge the prevailing consensus on the incentive effects of inside debt and suggest that prior evidence is likely confounded by omitted variable bias. |
| Keywords: | inside debt; pensions; deferred compensation; executive compensation; incentives; financial reporting quality; accrurals; earnings management; reexamination; replication |
| JEL: | M41 G32 G33 |
| Date: | 2025–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:128078 |
| By: | Jonathan S. Hartley; Kevin A. Hassett; Joshua D. Rauh |
| Abstract: | The Tax Cuts and Jobs Act of 2017 (TCJA) marked the first time in three decades that material changes were made to the corporate tax code of the United States. We use TCJA as a quasi natural experiment to estimate the impact of changes in user cost of capital on investment. Following the method of Auerbach and Hassett (1991), using cross-sectional data we find that the user cost is associated with higher rates of investment consistent with previous studies. BEA asset types with greater reductions in user cost of capital and marginal effective tax rate (METR) after the 2017 TCJA had greater statistically significant increases in their investment rates several years after the tax reform. Specifically, we find the magnitude of a 1 percentage point decrease in user cost is associated with a 1.68 to 3.05 percentage point increase in the rate of investment, larger than prior estimates of the responsiveness of investment with respect to user cost of capital. |
| JEL: | E22 H20 H25 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33914 |
| By: | William Chandler; Alastair Thomas; Frederic Tremblay |
| Abstract: | The value-added tax (VAT) has proved to be a highly effective tool at raising revenue in developed and developing countries alike. However, the effective operation of the VAT breaks down in the presence of exemptions. Unlike zero rates, exemptions deny input tax credits, thereby increasing production costs and resulting in VAT being embedded within the prices of goods and services. This paper develops a VAT model based on input-output table and household budget survey data for 29 European countries to examine the effects of VAT exemptions on final prices and to assess the merits of their use. Simulation results show that exemptions suffer from the same targeting problems as reduced VAT rates, but, in addition, they are non-transparent and have unpredictable and counterproductive indirect effects. These effects are in addition to the well-known distortionary impact of exemptions on production decisions, and their creation of incentives to self-supply. The paper concludes that the use of exemptions should be limited to addressing pragmatic concerns, such as the disproportionate compliance costs of small businesses and the practical difficulty in taxing margin-based financial services. |
| Date: | 2025–05–13 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11120 |
| By: | Gabriel Chodorow-Reich |
| Abstract: | Economists have widely varying opinions of how corporate taxation affects aggregate investment, output, and wages. This disagreement reflects a 60-year history of misapplication of the neoclassical theory of investment to interpret empirical work and guide policy analysis. In this article I reconsider the accumulated evidence relating tax policy to firm investment through the lens of the neoclassical theory. Empirical work suggests a range for the firm-level, short-run semi-elasticity of the investment-to-capital ratio to the user cost of -0.25 to -0.75. The mid-point of this range translates into values for the elasticity of firm revenue to capital of between 0.22 and 0.35. The implied general equilibrium, long-run elasticity of capital to the user cost can differ substantially from leading policy models. The elasticity of the wage to the user cost ranges from -0.3 to -0.7, or from -0.1 to -0.2 for changes to the user cost in the C-corporate sector alone. In the relatively low-tax regime in the U.S. in 2024, the neoclassical contribution to higher output from higher capital cannot rationalize more than modest dynamic tax revenue offsets from further reductions in corporate taxation. |
| JEL: | E23 G31 H25 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33922 |