Chelsea Rae Austin’s research while affiliated with University of South Carolina and other places

This study investigates how the timing of taxes on retirement savings affects spending. Our findings are based on an experiment where participants spend funds from either a deferred-tax account, where taxes are paid upon withdrawal, or a currently taxed account, which represents after-tax savings withdrawn tax-free. We find that deferred-tax account holders consume savings faster than currently taxed account holders with equal after-tax spending power. Further, given equivalent nominal balances, deferred-tax and currently taxed account holders spend nominally equivalent amounts on goods, despite deferred-tax account holders needing to pay taxes on withdrawals. This finding suggests deferred-tax account holders under-adjust for taxes and, therefore, consume their wealth faster. These findings have important implications for financial advisors and tax policy makers. They also add to a growing body of research showing that tax timing affects individual decision making and that currently taxed accounts often encourage individuals to make better retirement planning decisions. Data Availability: Data are available from the third author, upon request. JEL Classifications: H24; K34.

Prospect theory is often used to predict individuals’ risky tax decisions. For example, individuals who are in a tax due (refund) position are predicted to engage in more (less) tax noncompliance. This is known as the “withholding phenomenon”. However, tax noncompliance is not just risky, it is also unethical. We hypothesize that because there is an ethical component inherent in this risky decision, the feelings described by prospect theory are insufficient to cause increased risk-seeking. In a series of experiments, we show that moral disengagement is the primary theoretical mechanism that explains noncompliant tax behavior. The feelings evoked from being in a loss domain provide motivation for individuals to morally disengage, while moral disengagement is directly related to noncompliant tax behavior. We also develop an intervention that deters individuals from morally disengaging, specifically when they are in a tax due position. These results have important practical and theoretical implications.

The Organization for Economic Co-operation and Development (OECD) reports that a male favoring pay gap exists in every one of its member countries. To reduce the gender pay gap, governments and investors are demanding that companies disclose gender pay information. While companies seem to resist these demands, there is little evidence about how investors might react to the disclosure of gender pay information. We draw on theories of fairness and the instrumental perspective of corporate social responsibility activities to predict how the disclosure of gender pay information influences investor judgments. Our experimental findings indicate investors are more willing to invest in a company that discloses gender pay equity compared to either a company disclosing a gender pay gap or one disclosing no gender pay information. Further, our mediation analyses results show a sequential mediation process whereby the gender pay disclosure affects perceptions of fairness (economic consequences) directly (indirectly through fairness), with only perceptions of the economic consequences resulting from the gender pay disclosure directly influencing willingness to invest. In addition, despite the presence of the same sequential mediation relationship, we find limited evidence investors are less willing to invest in a company that discloses a typical gender pay gap compared to a company disclosing no gender pay information. Two additional experiments indicate it is the information about gender pay, not its disclosure by the company, that influences investors; and the effect is intentional. Our results are consistent with investors anticipating real economic consequences from the disclosure of gender pay information.

Based on prospect theory's value function, we predict how reference points adapt to influence individuals' tax evasion choices during and after experiencing temporary tax changes. Results from a multi-round experiment indicate reactions to temporary changes depend jointly on the direction of the change and expectations. Specifically, individuals experiencing a tax increase evade more while the increase is in effect. More interestingly, knowing, versus not knowing, a tax decrease is temporary prevents an increase in evasion after the temporary change expires, and may lead individuals to reduce evasion during the change. In a supplemental condition, we induce uncertainty by repeatedly extending a tax decrease. We find when uncertainty is introduced, both benefits of knowing the temporal nature of the decrease are lost. Overall results are consistent with individuals failing to adapt to a loss state and adapting quickly to a gain state unless they are certain the gain state is temporary.

While not explicitly stated, many tax avoidance studies seek to investigate tax avoidance that is the result of firms' deliberate actions. However, measures of firms' tax avoidance can also be affected by factors outside the firms' control—tax surprises. This study examines potential complications caused by tax surprises when measuring tax avoidance by focusing on one specific type of surprise tax savings—the unanticipated tax benefit from employees' exercise of stock options. Because the cash effective tax rate (ETR) includes the benefits of this tax surprise, the cash ETR mismeasures firms' deliberate tax avoidance. The analyses conducted show this mismeasurement is material and can lead to both Type I and Type II errors in studies of deliberate tax avoidance. Suggestions to aid researchers in mitigating these concerns are also provided.

We expect firms with the greatest exposure to reputational damage among consumers will engage in lower levels of tax avoidance to minimize unwanted scrutiny that could impair the firms’ reputation. We identify a set of firms with valuable consumer reputation using Harris Interactive’s EquiTrend survey, which surveys consumers about their perceptions of valuable and prominent brands. We find evidence in support of our hypothesis that firms with valuable brands will engage in less tax avoidance. Specifically, we find a positive and significant association between our measure of reputation and both the GAAP and cash effective tax rates (measured over one and three years). We find mixed evidence on whether there is a negative and significant association between reputation and the probability the firm is engaging in tax sheltering.

While not explicitly stated, many tax avoidance studies seek to investigate tax avoidance that is the result of firms' intentional choices. Stock option compensation can result in unanticipated reductions to a firm’s tax liability because the timing and magnitude of the related tax deduction is determined by employees’ exercise of stock options. Because CASHETR includes these unanticipated tax liability reductions, CASHETR mismeasures firms' intentional tax avoidance. I show this mismeasurement is material and can lead to inflated Type I error rates in studies of intentional tax avoidance. I also provide suggestions to aid researchers in mitigating these concerns.

We expect firms with the greatest exposure to reputational damage among consumers will engage in lower levels of tax avoidance to minimize unwanted scrutiny that could impair the firm’s reputation. We identify a set of firms with valuable consumer reputation using Harris Interactive’s EquiTrend survey, which surveys consumers about their perceptions of valuable and prominent brands. We find no evidence that more highly rated consumer brands are associated with less tax avoidance within the sample of EquiTrend firms. However, because these firms must have very valuable brands to be included in the survey we also compare the tax avoidance of the Equitrend firms to a matched set of control firms. We find no evidence firms owning at least one brand with a valuable consumer reputation engage in less tax avoidance than other firms. However, we do find evidence firms owning at least one valuable brand have higher GAAP effective tax rates than matched control firms without a brand valuable enough to be included in the EquiTrend survey. These results suggest managers of firms with valuable consumer brands use discretion inherent in financial reporting rules to report the benefits of tax planning more conservatively.