Advances in Taxation: Volume 14

The purpose of this study is to further the examination of the effectiveness of the earned income tax credit (EITC) in meeting one of Congress' major objectives for the credit: increasing work incentives. Economic theory predicts a potential work incentive in the phase-in range of the credit and a potential work disincentive in the phase-out range. This study utilizes empirical analysis of individual tax return data to evaluate EITC participants' and comparable non-participants' wage income cross-sectionally and over time for indications of statistically significant changes. Observations are grouped into income classifications based on the income ranges of the credit: phase-in, plateau, and phase-out.The wages for EITC participants, as well as for non-participants, increased significantly over selected time windows during the 1979 to 1990 time period. Wage growth for both participants and non-participants was greater in the phase-in range than in the phase-out range. The potential existence of significant differences in income growth between participants andnon-participants is only indicated for the time period of the mid-1980s, before the major increase in the credit post-1986. Contrary to theory, the current study estimates a potential disincentive in the mid-1980s in the phase-in range, as well as the phase-out range. However, after the post-1986 increase in the credit, the differences between the participants and non-participants are no longer statistically significant and a potential disincentive cannot be inferred.

For taxpayer communications made after July 21 1998 IRC Section 7525 extends a confidentiality privilege to tax advice furnished in non-criminal proceedings by certified public accountants and other federally authorized tax practitioners to the extent such communication would be privileged if it took place between a taxpayer and an attorney. However, subsequent to the enactment of the statute, concerns have been raised about the scope and usefulness of the accountant-client privilege. This article presents an examination of the historical development, statutory provisions, and limitations of IRC Section 7525. It also evaluates, through the use of survey responses, the impact of the privilege on the accounting profession. This study is valuable because it is one of the first to examine the confidentiality privilege by using feedback (via a survey) from the accounting profession.

The purpose of this study was to evaluate the effectiveness of instructional strategies on how students learn and apply tax knowledge. Accounting students participated in an experiment to determine whether the choice of a procedural or conceptual instructional method enhanced the students' ability to solve problems. Further, the effect of cognitive level of development and success in answering questions was investigated.Results show that the method of instruction was instrumental in solving routine problems but not in solving novel problems. Students with a high (formal) level of cognitive development were better able to solve both routine and novel problems than students of medium (transitional) and low (concrete) cognitive development.

Many studies find that taxes influence capital location, income shifting, and capital structure decisions of multinational companies. So, reasonably estimating the marginal tax effect of international business decisions is important. However, simple marginal tax rate (MTR) proxies, such as a foreign country's top statutory rate or a rate that assumes remittance of all foreign profits as current dividends, fail to capture many tax law complexities. This article develops an algebraic “mixed remittance” model for calculating a U.S. company's MTR on its foreign subsidiary's profits. In contrast to the simpler proxies, the mixed remittance model allows foreign profits to be remitted in different forms (i.e. not just as dividends) and across varying time periods (i.e. not just the current period[t Also, the mixed remittance model considers withholding taxes, tax deferrals from postponed dividends, and foreign tax credit positions. Paired t-tests show that the resulting MTR measure often differs significantly from the two simpler MTR proxies.

This study examines whether there is a tax incentive for firms to engage in stock buybacks. Using methods previously established by Manzon (1994) and Scholes and Wolfson (1989), the results show that firms with high marginal tax rates are more likely to announce stock buybacks than firms with low marginal tax rates. Additionally, firms that announce stock buybacks have lower debt-equity ratios than firms that do not announce buybacks. Tax considerations do not appear to be a factor in the acquisition technique used, open market or tender offer. However, the tax motive and limited investment alternatives appear to be the major explanatory variables in the stock buyback decision.

An examination of interagency evaluations of the IRS taxpayer assistance programs is used to infer the level of IRS taxpayer service. Congress mandated that IRS provide “top quality service” to taxpayers as part of the 1998 Tax Act. Based on these assessments, it appears that the IRS is not providing adequate service.The reports analyzed document a system that needs corrective actions. Until upper level IRS management publicly acknowledges the situation, inadequate service will continue. Congress must also recognize the extent of the problems and that its 1998 mandate is not near full implementation. Unless corrective actions occur, it appears that this mandate remains as only a politically expedient reaction to the 1997 Congressional hearings on IRS abuses.

This study summarizes an IRS database that includes over 500 Customer Satisfaction Surveys (CSS) from individual taxpayers who were field audited in 1998. Descriptive statistics are provided indicating that most taxpayers were satisfied with the audit process. Most questions on the IRS survey were associated with overall audit attitude. Two variables affecting audit attitudes were additional tax assessments and use of a paid preparer. Those owing additional taxes as a result of the audit were more likely to have a negative attitude toward the audit process. Those using a paid preparer also tended to have a more negative attitude. The paper discusses reasons why those with preparer assistance were more disappointed (e.g. IRS examiner was not knowledgeable, audit took too long, and the audit outcome was worse than expected).

Wealth transfer taxes, including the estate tax, have been an integral part of American tax policy since the eighteenth century. The current estate tax has its roots in eighteenth century English political philosophy that provides civil law precedent over any natural rights an individual possesses in property. The purpose of the tax is to limit wealth accumulation and discourage the formation of economic dynasties.Since the adoption of the Sixteenth Amendment to the Constitution and passage of the Revenue Act of 1916, the estate tax has largely targeted high-wealth individuals. The modern estate tax began with a narrow base and relatively low rates. The tax base has expanded during the past 80 years to include both estate and lifetime transfers and tax rates have ranged from 10 to 77%. During this time, the degree of rate progressivity has remained high but has decreased since 1976. The incidence of the tax has varied over the years due in large part to the size of the estate tax exemption or its equivalent.The estate tax's contribution to the federal budget has ranged from over five percent to its current level of about one percent. The estate tax's growth, however, has accelerated in recent years as personal wealth has increased and American society has aged.

The replacement of the book-income adjustment (BIA) component of the corporate alternative minimum tax (AMT) formula with the adjusted current earnings (ACE) component in 1990 increased the effective tax rate on interest income from municipal bonds and lowered the yield on municipal bonds relative to taxable bonds. This study assesses the effects of the replacement of the BIA with the ACE on municipal bond holdings for a sample of 72 banks over the 1987–1993 period. Results show that banks that were likely to pay the AMT held significantly lower amounts of municipal bonds in the period following the enactment of the ACE adjustment than banks that were likely to pay the regular tax.

Investment companies dominate U.S. equity markets, both in terms of the large proportion of equity capital they control and the sizable trading volume they generate. This shift in the ownership of U.S. equity securities could lessen the impact of changes in U.S. capital gains tax policy which are aimed at individual investors. This paper examines the effect of capital gains tax rates on investment company capital gains realizations. Empirical tests on cross-sectional, time-series data provide evidence of an unlocking effect of lower marginal capital gains tax rates. Investment companies exhibit economic response behavior consistent with the lock-in effect characteristic of individual investors. Capital gains realized are higher during periods of low marginal capital gains tax rates. The significant permanent tax effects estimated in the analysis are strengthened when transitory effects are introduced into the model.

This study examines the effects of personal and corporate tax rate changes on the spread between pre-tax corporate bond yields and municipal bond yields, and provides evidence of tax clientele differences across bonds of different maturities and across bonds of different risk levels. Implicit tax theory suggests that the personal and corporate tax rate reductions of ERTA and TRA86 should reduce the yield spread between corporate and municipal bonds. The sample consists of 2,770 newly-issued taxable corporate bonds over the period 1979–1989. Each corporate bond issue is matched with a similar municipal bond issue. The implicit tax rate (ITR) is used to measure the spread between corporate and municipal bond yields, and is equal to the yield spread divided by the corporate bond yield.For the, full sample, reductions in the personal and corporate tax rates both decrease ITR. However, the results differ across tax regimes. prior to TRA86, changes in the personal and corporate tax rates have similar effects on ITR. Subsequent to TRA86, changes in the personal tax rate become more important and have a greater effect on ITR than changes in the corporate tax rate. The sample is also divided across time-to-maturity (short/long) and risk level (low/medium). Evidence suggests that: (1) prior to TRA86, the marginal investors in medium-risk, short-term bonds were corporations, while the marginal investors in low-risk, short-term bonds were both individuals and corporations; (2) prior to TRA86, the marginal investors in long-term bonds were both individuals and corporations, regardless of risk level; and (3) subsequent to TRA86, the marginal investors in both short-term and long-term bonds are individuals, regardless of risk level.