Declining tax payments among profitable U.S. firms: changes in firm characteristics, tax rates, and propensity to pay taxes

Yuzhu Lu Lingnan University yuzhulu@ln.edu.hk

Liang Shao

Hong Kong Baptist University lshao@hkbu.edu.hk

Yue Zhang

Lingnan University zhangyuezhang@ln.edu.hk

Current Version: August 2016

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Declining tax payments among profitable U.S. firms: changes in firm characteristics, tax rates, and propensity to pay taxes

Abstract Using 153,949 profitable U.S. public firm-years from 1956-2013, we observe that the tax expense to asset ratio (TAX_AT) decreases by around 7 basis points each year. We decompose this trend and find that 36.09, 52.44, and 11.47% result from changes in firm characteristics, the statutory tax rate, and firms’ propensity to pay taxes, respectively. In particular, we find that before 1988, the declining trend in tax payments is mainly driven by changes in firm characteristics and the statutory tax rate. In contrast, after 1988 the trend is mainly driven by a decreasing propensity to pay taxes that, while prevalent across different groups of firms, is more pronounced among firms with multinational operations, high earnings, strong governance, and high demand for earnings management and cash. Our findings facilitate a more comprehensive understanding of the recent trend in firms’ tax avoidance while generating insights into how to improve tax enforcement. JEL Classification: H26, M41 Key words: corporate tax avoidance, downward trend, firm characteristics, statutory tax rate, propensity to pay tax

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Declining tax payments among profitable U.S. firms: changes in firm characteristics, tax rates, and propensity to pay taxes

1. Introduction

The relative magnitude of income taxes paid by U.S. firms has been declining since

World War II. The total corporate income taxes in 2013 accounted for 1.6 and 9.6% of the

U.S. GDP and fiscal revenues, respectively—a sharp drop from 5.9 and 31.8% in 1952.1

Recently, the blame has fallen on an increase in tax-sheltering activities attributed to large

and multinational firms that manipulate taxable income numbers and defer tax payments by

delaying profit remittances from overseas. 2 Appeals have also arisen for stricter tax

enforcement or tax-rate reductions.3 The prerequisite for any effective tax reform is a sound

understanding of why firms are paying less. To this end, we examine the factors that drive

this declining trend in a sample of U.S. public firms. We include only profitable firm-years

and exclude firms operating in financial/utility industries. For this exercise, we collect

153,949 firm-years spanning 1956-2013.

We first confirm that the declining trend in corporate tax payments exists for our sample

firms. The effective tax rate (ETR, measured by income taxes scaled by pretax income)

dropped from 47% in 1956 to 28% in 2013, falling below the federal statutory tax rate every

1 Data source: https://www.whitehouse.gov/omb/budget/Historicals. 2 For example, the tax receipts on corporate income of U.S. firms dropped from 50% in 1951 to about 17% in 2011 (Federal Reserve Bank of St. Louis: https://research.stlouisfed.org/fred2/graph/?g=aWA), and the deferred corporate foreign earnings increased from 286 billion in 2001 to 1,266 billion in 2010 (Credit Suisse, Parking Earnings Overseas $1.3 Trillion Parking Lot for the S&P 500? Equity Research, April 2011). 3 See, for example, Tax Reform in the 114th Congress: An Overview of Proposals https://www.fas.org/sgp/crs/misc/R43060.pdf.

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year, and the income taxes to total asset ratio decreases from 8% in 1956 to less than 3% in

2013.

We next investigate whether the declining trend in tax payments results from changes

in tax-saving related firm characteristics, reductions in the statutory tax rate, or a decreasing

propensity to pay taxes. Although alternative measures generate similar results, we employ

TAX_AT , income taxes scaled by total assets, to quantify the extent to which a firm pays

income taxes. It is appropriate to standardize the firm characteristics in our regression, such

as R&D expense and debt, with total assets to ease heterogeneity in scale. At the meantime,

as shown in our regression specification in Section 2, the sensitivity of TAX_AT to return on

assets (ROA) is equivalent to the effective tax rate (ETR), a popular measure of tax payment

in literature.

We choose 1956-1960 as the base period and estimate a regression model of TAX_AT on

return on assets (ROA) and other firm characteristics that the literature has deemed relevant to

tax saving. With the coefficients (including the intercept) from the base-period regression and

the contemporary statutory tax rate, we compute the ‘expected’ tax payment (Expected_Tax)

for each subsequent three-year time window with contemporary firm characteristics.

Expected_Tax thus captures the effects of changes in the statutory tax rate and firm

characteristics, and the difference between the actual tax payment (TAX_AT) and

Expected_Tax is caused by overall changes in the model’s coefficients, which we refer to as

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firms’ propensity to pay taxes. A decreasing propensity to pay taxes would suggest that firms

have become less likely to pay taxes regardless of their characteristics and changes in

statutory tax rate. We further decompose the propensity to pay taxes into ‘identified’ and

‘unidentified’ propensity. The identified propensity is measured by changes in the coefficients

of the firm characteristics included in the regression except ROA. The unidentified propensity

is measured by changes in the intercept and the coefficient of ROA in short of the statutory

tax rate4. We call it “unidentified” because the intercept and the coefficient of ROA are not

correlated with the controlled firm characteristics. The unidentified propensity captures either

the opportunities available for firms to reduce their tax burden which are not explained by the

traditional tax avoidance model (Equation 6) or firms’ increasing motivations for tax saving.

With this approach, we observe a declining trend in tax payment among U.S. profitable

corporations in the last half century. Over the full sample period (1961-2013), TAX_AT

decreases by around 7 basis points each year, of which 36.09, 52.44, and 11.47% result from

changes in firm characteristics, reductions in the statutory tax rate, and a lower propensity to

pay taxes, respectively. Among the firm characteristics, ROA is the most significant factor.

The downward trend in ROA explains 47.29% of the annual trend of TAX_AT. We also find

that the identified propensity to pay taxes (i.e., changes in the coefficients of the firm

4 Please refer to section 2 – methodology for more detailed explanation on regression specification.5 Including a constant on the right side of Equation (2), assuming that each firm can save a fixed amount of tax expense in year t, does not change our results, and the corresponding variable of this constant in Equation (3) does not have a significant coefficient.

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characteristics, except ROA) contributes little to the declining trend of TAX_AT, and most of

the change in the propensity to pay taxes results from the coefficient of ROA drifting farther

beneath the statutory tax rate over time.

Interestingly, we also find that there is a structural change in why corporations pay less

taxes and the turning point coincides with the last overhaul of the U.S. statutory tax rate in

1987. Over 1961-1987, the tax payment trend is mainly explained by changes in firm

characteristics, whereas over 1988-2013 the trend is mainly explained by a lower propensity

to pay taxes. In 1961-1987, changes in firm characteristics and the statutory tax rate explain

66% and 35.51% of the decreasing TAX_AT trend, respectively, whereas in 1988-2013, the

unidentified and identified propensity accounted for 105.63% and 39.92% of the trend,

respectively.

To further examine which group of firms is important in driving the decreasing

propensity to pay taxes in 1988-2013, we repeat the analysis for the sub-samples based on

multinationality, earnings scale, corporate governance strength, earnings management

incentives, and the need for cash. The downward trend in the propensity to pay taxes is

ubiquitous, but more pronounced among firms with multinational operations, high earnings,

strong governance, and high demand for earnings management and cash.

The first contribution of this paper is that, by decomposing the overall trend of tax

payment, we identify which factors are driving the declination of tax payment and provide

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clear implications to policy makers. Particularly, the unidentified propensity measures the

extent to which corporations tend to pay taxes regardless of their characteristics and tax

policies, and is especially helpful for tax research. For example, Dyreng, Hanlon, Maydew,

and Thornock (2016) find that the magnitude of the declining trend in tax payment in the U.S

is about the same between domestic and multinational companies, whereas based on the

unidentified propensity we show that tax reduction is faster among multinational corporations.

Distinguishing the unidentified propensity form the overall tax trend is also informative for

policy makers. The declination of tax revenues is not an urgent issue to tax authorities if it is

due to only changes in firm characteristics and tax policies (such as more tax credit

opportunities). However, if the declination is caused by an unobservable lower propensity to

pay taxes, there should be a real need to investigate in more depth or strengthen tax

collection.

Second, the wide time window in this paper provides a bigger picture on how tax

payment evolves among corporations through time, and thus accentuate the particularity of

the tax trend in recent 25 years. Several studies record a downward trend in corporate tax

payments over various periods. Auerbach and Poterba (1987) find that the decrease in U.S.

corporate tax revenue from 1960s to early 1980s was mainly driven by a decrease in

corporate profit. Manzon and Plesko (2002) show that the increasing trend in book-tax

difference between 1991 and 1997 was related to a set of accounting-based variables that

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were explicitly accrued under financial and tax accounting. Desai (2003) attributes the

increase in book-tax difference in 1982-2000 to the decreased costs of tax shelters. Klassen

and Laplante (2012) observe that U.S. multinational firms became more active in shifting

income out of the U.S. in 1988-2009 due to changes in associated regulatory costs. Dyreng et

al. (2016) find that the effective tax rate of U.S. firms decreased by about 40 basis points per

year on average in 1988-2012. The paper’s results integrate these findings and, more

importantly, reveal a structural change around 1988 in the reasons for tax payment reductions.

The recent 25 years merit special research to figure out why the propensity to pay taxes has

been decreasing.

Third, we provide insights into why firms have become more aggressive in tax saving

after 1988 (a lower propensity to pay taxes). We find that the declining trend in firms’

propensity to pay taxes is more pronounced among firms with tax saving incentives, namely,

firms with multinational operations, high earnings, strong governance, and high demand for

earnings management and cash. This suggests that one reason for the declining tax payment

in the last 25 years is that firms are more and more taking advantage of foreign income and

strong governance to save taxes, and more and more relying on tax savings to manipulate

earnings and accumulate cash.

The remainder of this paper proceeds as follows. Section 2 presents the regression model

we use to examine the determinants of corporate tax payments and decompose the trend.

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Sections 3 and 4 report the sample and empirical results, and Section 5 concludes the paper.

2. Empirical Design

Following previous work explaining the time trends of corporate decisions, such as

dividend occurrences (Fama and French, 2001) and cash holdings (Bates, Kahle, and Stulz,

2009), we examine to what extent the decline of tax payments by profitable U.S. corporations

is caused by changing firm characteristics and tax rates versus firms’ reduced propensity to

pay taxes. To explore how tax responsibilities are mapped into relevant firm characteristics,

we start with the following cross-section equation for each year t:

taxi,t = Tt ×pretaxi,t + tsi,t , (1)

where Tt is the statutory tax rate in year t; taxi,t and pretaxi,t are tax responsibilities and pretax

income, respectively, reported by firm i in year t; tsi,t is firm i’s tax savings in year t and

negative tsi,t values correspond to a firm reporting tax responsibilities less than what its pretax

income suggests. We further assume that

tsi,t = -θt × pretaxi,t + ∑nβn,t × fn,i,t + ui,t . (2)

The vector of fn,i,t represents the firm-level quantities associated with tax savings (e.g., R&D

expenses, capital expenditure, loss carryforward, and special items) and the vector of βn,t

represents the corresponding time-varying coefficients (propensities). A firm may be subject

to lower tax responsibilities if it invests more in fn,i,t or manages fn,i,t to become more eligible

for tax savings (reflected by more negative βn,t values). Firms can also make other

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arrangements that are independent of fn,i,t to reduce tax duty, which we model by θt × pretaxi,t

and ui,t.5 θt is the average tax-saving effort (as a portion of pretaxi,t) among firms in year t

that is not captured by the vector of fn,i,t. ui,t is a firm-level residual. We put a negative sign

before θt so that more positive θt values represent more aggressive tax savings among firms in

year t.

Substituting (2) into (1) and scaling both sides of the equation with total assets generates

our cross-section regression specification:

TAX_ATi,t = Interceptt + (Tt - θt) × ROAi,t + ∑n βn,t × Fn,i,t + ɛi,t . (3)

TAX_ATi,t, ROAi,t, and Fn,i,t are taxi,t, pretaxi,t, and fn,i,t scaled by a firm’s total assets,

respectively, in order to overcome heteroskedasticity, following Frank et al. (2009). In this

annual regression, Interceptt measures firms’ tax-saving efforts (as a portion of total assets)

that are not correlated with pretax income. The vector of βn,t captures the sensitivities of tax

responsibilities to firm characteristics Fn,i,t. If firms are more aggressive in avoiding tax

through managing the variables captured by Fn,i,t, we should observe more negative values for

βn,t.

Given the regression coefficients in Equation (3), the annual average tax responsibilities

as a portion of total assets can be calculated by

ATTAX _ t = Interceptt + (Tt - θt) × ROA t + ∑n βn,t × F̅n,t. (4) 5 Including a constant on the right side of Equation (2), assuming that each firm can save a fixed amount of tax expense in year t, does not change our results, and the corresponding variable of this constant in Equation (3) does not have a significant coefficient.

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If we pick the first year (year 0) in the sample as the base year for studying the time trend of

tax responsibilities,then,

ATTAX _ t = {Intercept0 + T0× ROA t +∑n βn,0 × F̅n,t} + {∆Tt × ROA t} + {∆Interceptt - θt ×

ROA t +∑n ∆βn,t × F̅n,t}, (5)

where ∆ denotes the difference between year t and year 0.

Thus, we decompose the annual average of tax responsibilities into two components. The

first component, Expected_Tax, measures the ‘expected’ annual average tax responsibilities in

year t according to the contemporaneous statutory tax rate and firm characteristics for which

the coefficients are set to equal those from the base year. It includes two sub-components,

{Intercept0 + T0× ROA t +∑n βn,0 × F̅n,t}, which we refer to as Expected_Tax_Firm, is the

expected annual average tax responsibilities in year t given the coefficients and statutory tax

rate in the base year and contemporaneous firm characteristics, and {∆Tt × ROA t}, which we

refer to as Expected_Tax_Rate, is the effect of changes in the statutory tax rate on firms’ tax

payment.

The second component (which we refer to as Propensity), {∆Interceptt - θt × ROA t +∑n

∆βn,t × F̅n,t}, is the difference between the actual annual average of tax responsibilities

TAX_ATi,t and Expected_Tax, and it measures firms’ propensity to pay taxes in year t. We

further decompose this second component into ∑n ∆βn,t × F̅n,t, which measures the propensity

to pay taxes that is associated with the firm characteristics (Propensity_Identified), and

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∆Interceptt - θt × ROA t, which measures the propensity to pay taxes that is not associated with

the firm characteristics (Propensity_Unidentified).

Accordingly, the trend in the annual average of tax responsibilities is the sum of the

trends of these two components, Expected_Tax and Propensity, capturing changes in the

statutory tax rate and firm characteristics and in firms’ propensity to pay taxes, respectively.

With regard to Fn,i,t in Equation (3), we use firm characteristics that have been shown in

the literature to be associated with tax savings (e.g., Chen et al., 2010; Manzon and Plesko,

2002; Mills, 1998; Rego, 2003; Dyreng et al., 2008; Frank et al., 2009).

TAX_ATi,t = Interceptt + (Tt - θt) × ROAi,t + β1,t × LEVi,t + β2,t × RNDi,t + β3,t × PPEi,t + β4,t

× INTANi,t + β5,t × EQINCi,t + β6,t × ∆NOLi,t + β7,t × CAPXi,t + β8,t × SPIi,t + ɛi,t , (6)

where TAX_AT is the total income taxes (COMPUSTAT item TXT) scaled by total assets

(COMPUSTAT item AT).6 All of the independent variables in Equation (6) are scaled by

total assets and are winsorized at the 1% and 99% level to amend the effect of outliers on the

results. ROA is pretax income (COMPUSTAT item PI). LEV is the total debt (COMPUSTAT

item DLTT plus DLC). According to prior research, leverage is negatively related to effective

tax rate because interest on debt is tax deductible (Skickney and McGee, 1982). RND is

6 Untabulated results using cash taxes paid (COMPUSTAT item TXPD) scaled by total assets and using

effective tax rate (COMPUSTAT item TXT divided by item PI) as alternative measures of tax responsibilities

generate similar results.

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research and development expense (COMPUSTAT item XRD). Expenditure on research and

development is deductible for tax purposes, and thus is predicted to be negatively related to

our dependent variable (Dyreng et al., 2016). We include PPE and INTAN because of the

differential rules for fixed and intangible assets between financial and tax accounting. PPE is

the total property, plants, and equipment (COMPUSTAT item PPENT). Research has also

identified a negative relationship between capital intensity and effective tax rate due to the

government’s favorable tax treatment of investments in depreciable assets (Skickney and

McGee, 1982; Manzon and Plesko, 2002). INTAN is the intangible assets (COMPUSTAT

item INTAN). The relationship between the percentage of intangible assets and effective tax

rate can be positive or negative depending on the amortization periods (Manzon and Plesko,

2002). EQINC is the equity income in earnings (COMPUSTAT item ESUB). This variable is

included to control for differential book and tax treatments of consolidated earnings based on

the equity method and is expected to be negatively related to TAX_AT (Chen et al., 2010).

ΔNOL is the change in a firm’s net operating loss carryforward (COMPUSTAT item TLCF).

We include ΔNOL to control for its association with changes in the valuation allowance

account (Frank et al., 2009) and predict it to be positively related to TAX_AT. CAPX is the

capital expenditure (COMPUSTAT item CAPX). We expect a negative relationship between

TAX_AT and CAPX due to the government’s favorable tax treatment encouraging investments.

SPI is the amount of special items (COMPUSTAT item SPI), which are deductible for tax

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purposes later than when they are recognized for financial reporting purposes, and hence SPI

is predicted to be negatively related to TAX_AT (Dyreng et al., 2016).

Appendix 1 presents the descriptive statistics for the variables in Equation (6). The mean

(median) of TAX_AT equals 4.3% (3.45%). The mean (median) of ROA is approximately

11.3% (9.5%). The relatively high value of ROA results from our sample only comprising

profitable firms. Consistent with other studies on tax avoidance (e.g., Dyreng et al., 2016),

our sample firms are highly levered (the mean/median LEV is 22.2%/20.5%), and SPI has a

negative mean of -0.1% and a zero median.

3. Explaining the trend in tax payments

3.1 Declining tax payments in the 1956-2013 sample period

Our sample includes all of the U.S. public firms in COMPUSTAT from 1956 to 2013,

excluding firm-years (1) from financial (SIC codes 6000-6999) and utilities (SIC codes

4900-4999) industries, (2) with negative assets or total liabilities exceeding total assets, (3)

with missing information for the variables in Equation (6), and (4) with zero or negative

pretax income. These screenings result in a sample of 153,949 firm-years from 15,091 firms.

We plot the average effective tax rate (ETR) for each year in Figure 1 and the average

ratio of income tax to total assets (TAX_AT) in Figure 2. Both Figures 1 and 2 demonstrate a

declining trend in tax payments in the past 50 years. The mean ETR was about 47% in 1956

but declined to about 28% in 2013. Even after the last overhaul on the statutory tax rate in

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1987, since which the statutory tax rate has been stable (34-35%), the trend still exists.

TAX_AT declined from 8% in 1956 to under 3% in 2013, suggesting a yearly trend of

-0.086%.

3.2 Triennial regressions

To study the changes in firms’ propensity to pay taxes, we estimate annual regressions

based on Equation (6) and track the time-series trends of the regression coefficients. To

reduce the effect of firms’ inter-temporal tax management and facilitate concise presentations

in tables and figures, we estimate triennial regressions for each three-year window between

1961 and 2013, which generates qualitatively similar results as the annual regressions. Panels

A and B in Table 1 present the coefficients for the 1961-1987 and 1988-2013 periods,

respectively. The signs of the coefficients are largely consistent with our predictions in

Section 2. Several patterns in the coefficient time series stand out. First, the coefficient on

ROA shows a mostly monotonous down-trend over the entire sample period, from 0.499 in

1961-1963 to 0.285 in 2012-2013. We also find that this coefficient has been drifting further

underneath the contemporary statutory tax rate, which should have been the coefficient on

ROA if the other control variables captured all of the untaxed income. This finding suggests

that the portion of pretax income that corporations claim to be untaxable has been growing,

and hence the sensitivity of tax responsibilities to pretax income declines. Second, the

coefficients of LEV and RND become more negative over time, suggesting more tax-saving

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propensities from holding debt and R&D investment. This should mostly result from growing

tax deductions for interest expenses and innovative investments. Third, the coefficients of

PPE and EQINC increase over time, suggesting that corporations have been less able to save

taxes from holding fixed assets and from the exemption of earnings arising from holding

other companies’ equity. Fourth, the intercept does not have a statistically significant trend in

the sample, and hence the tax savings demand curve has not shifted up or down in the last 50

years. Fifth, R2 dropped from 91.7% in 1961-1963 to 58.9% in 2012-2013. The

cross-sectional difference in tax savings has, to a larger extent, been driven by factors other

than the controls in Equation (6) in recent years. In our empirical setting, the average effect of

these uncontrolled factors is captured by the extent to which the coefficient of ROA deviates

from the statutory tax rate.

The results in Table 1 suggest that the descending trend in tax payments may result from

changes in firms’ propensity to pay taxes (i.e., the decreasing coefficients of ROA, LEV, and

RND over time). Admittedly, changing firm characteristics, in addition to a declining

statutory tax rate, provide another non-exclusive explanation. Table 2 reports the means of the

firm characteristics in Equation (6) for every three-year window. We also estimate the

coefficient, namely Trend, of regressing the means of each variable on the first year of each

three-year window and report Trend in the bottom row of Table 2. We find that firms have

been less profitable (i.e., decreasing ROA over time) and investing more in R&D that is

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eligible for tax credits, and Trend of these two variables are statistically significant. These

changes can possibly drive lower tax payments. In summary, the findings in Tables 1 and 2

necessitate further decomposition analysis of the tax payment trend.

3.3 Decomposing the declining trend in tax payment

We now investigate the sources leading to the declining trend in tax payments. We first

estimate a regression model based on Equation (6) for the time window 1956-1960 as the

base period (year 0 in Equation 5).7 Following Equation (5), we decompose the average

TAX_AT into Expected_Tax and Propensity. Expected_Tax is the total expected tax payment.

It captures the trend of expected tax payment due to the changes in both firm characteristics

and the statutory tax rate. Propensity is firms’ propensity to pay taxes. It is the difference

between TAX_AT and Expected_Tax and captures firms’ propensity to pay taxes due to the

changes in the coefficients of firm characteristics and other unidentified factors associated

with tax payment.

We further decompose Expected_Tax into .Expected_Tax_Firm and Expected_Tax_Rate.

Expected_Tax equals the sum of Expected_Tax_Firm and Expected_Tax_Rate.

Expected_Tax_Firm for each three-year window t (e.g., 1961-1963 and so on) is computed by

substituting the means of firm-level variables from three-year window t into the base-period

regression (1956-1960):

7In untabulated tests, we find that alternative base periods such as 1956-1969 generate similar results.

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0.00229 + 0.52 × ROA t + 0.00204 × LEV t – 0.00114 × RND t – 0.0145 × PPE t + 0.0146 ×

INTAN t – 0.543 × EQINC t – 0.0377 × NOL∆ t + 0.000378 ×CAPX t – 0.0147× SPI t,

where the coefficients are from the base-period regression. Expected_Tax_Rate captures the

effect of the changing statutory tax rate on average tax payment and is calculated as {∆Tt ×

ROA t}, where ΔTt is the difference in the average statutory tax rate between three-year time

window t (Tt) and the base period (T0).

Figure 3 plots the actual average tax payment (TAX_AT) and expected tax payment

controlling for contemporary firm characteristics (Expected_Tax_Firm) and total expected tax

payment controlling for both contemporary firm characteristics and the statutory tax rate

(Expected_Tax) across the time windows. In the time window of 1988-1991, both

Expected_Tax and TAX_AT exhibit a sudden drop, in line with the tax rate overhaul in 1987.

More importantly, we observe distinct patterns in Figure 3 before and after 1988. First, the

declining trend in TAX_AT exists throughout the sample period but slows down somewhat

after 1988. Second, Expected_Tax largely overlaps with TAX_AT before 1988, implying that

changes in firm characteristics and the statutory tax rate explain most of the declining trend in

tax payments, and firms’ propensity to pay taxes is stable between 1961 and 1987. Third,

after 1988, the declining trends in Expected_Tax_Firm and Expected_Tax disappear and there

is a growing divergence between TAX_AT and Expected_Tax, suggesting that changes in firm

characteristics and the statutory tax rate cannot explain the trend of TAX_AT in the post-1988

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period, and Propensity (the difference between TAX_AT and Expected_Tax) become the main

factor.

To accentuate the dynamics of the propensity to pay taxes over time, in Figure 4 we

plot Propensity; that is, the deviation of TAX_AT from Expected_Tax. Compared with the

1961-1987 period, Propensity shows a dramatic declining trend during the 1988-2013 period

from 0.00136 in 1988-1990 to -0.00799 in 2012-2013. This suggests that after 1988, firms

may have become more aggressive in tax saving with strategies not captured by the

controlled firm-level variables.

Figures 3 and 4 suggest that the declining trend in tax payments is driven by different

factors before and after 1988. Changes in firm characteristics and the statutory tax rate are the

major reasons before 1988, whereas a decreasing propensity to pay taxes takes their place

after 1988. It is necessary to conduct sub-period analyses separately for 1961-1987 and

1988-2013.

In Panel A of Table 3 we present, for every three-year window, the actual tax payment

(TAX_AT), expected tax payment (Expected_Tax), and firms’ propensity to pay taxes

(Propensity), together with their sub-components, i.e., expected tax payment controlling for

firm characteristics (Expected_Tax_Firm), expected tax payment controlling for statutory tax

rate (Expected_Tax_Rate), identified propensity to pay tax (Propensity_Identified) and

unidentified propensity to pay tax (Propensity_Unidentified). In addition, we report the year

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trends (Trend) of TAX_AT and each component for the full sample period and sub-periods of

1961-1987 and 1988-2013.

Over the full sample period (1961-2013), changes in firm characteristics and the

statutory tax rate together explain 88.53% of the trend in TAX_AT. Expected_Tax_Firm,

which captures the effects of changing firm characteristics, has a year trend of -0.00027,

meaning on average Expected_Tax_Firm decreases 0.00027 per year; such trend is equivalent

to 36.09% of for the trend of TAX_AT. On the other hand, Expected_Tax_Rate, which

captures the effect of a changing statutory tax rate, has a year trend of -0.039% (equivalent to

52.44% of that for TAX_AT). The remaining 11.47% of the trend of TAX_AT is explained by

firms’ decreasing propensity to pay taxes (Propensity).

The statistics for the sub-periods in Panel A of Table 3 are consistent with the

observations in Figures 3 and 4. In the 1961-1987 sub-period, Expected_Tax shows a year

trend of -0.00069, accounting for 101.51% of the trend of TAX_AT, whereas Propensity

shows a slightly upward trend, the magnitude of which equals 1.51% of that of TAX_AT. The

trend of TAX_AT is hence mostly explained by changing firm characteristics and the statutory

tax rate over the 1961-1987 period, which accounts for 66 and 35.51% of the total trend,

respectively. In the 1988-2013 sub-period, the trend of TAX_AT (-0.0003) is about 44% of

that in 1961-1987 (-0.00068). Interestingly, both Expected_Tax_Firm and Expected_Tax_Rate

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show an upward trend, but it is completely submerged by a sharply declining trend in

Propensity, leading to a declining overall trend in TAX_AT. The two sub-components of

Propensity—Propensity_Identified and Propensity_Unidentified—explain 39.92 and

105.63% of the TAX_AT trend, respectively.

In summary, the declining trend in firms’ actual tax payments is driven by distinct

factors before and after 1988 for our sample. Changes in firm characteristics and reductions

in the statutory tax rate explain the trend over the 1961-1987 period, and a decreasing

propensity to pay taxes plays that role over the 1988-2013 period. Accordingly, we examine

which firm characteristics and propensity types are important for the trends over the

1961-1987 and 1988-2013 periods, respectively.

In Panel B of Table 3, we report a breakdown in the trend of Expected_Tax attributable

to the changes in firm characteristics and the statutory tax rate for the full sample period and

two sub-periods. Among the firm characteristics, declining profitability is the major factor

driving the trend of TAX_AT across the sub-periods. For the entire sample period, changes in

ROA generate a decreasing trend of -0.00035 in tax payments, accounting for 47.29% of the

total decreasing trend in TAX_AT. Consistent with the results in Panel A, the effect of

declining profitability is much smaller in 1988-2013 than in 1961-1987; specifically, the

contributions of declining profitability are 67.40 and 17.59% of the trend in TAX_AT in

21

1961-1987 and 1988-2013, respectively. None of the other firm characteristics contribute

more than 10% of the total trend of TAX_AT in any period.

In Panel C of Table 3, we report a breakdown in the trend of Propensity. Our focus is the

1988-2013 sub-period because the effect of Propensity on the trend of TAX_AT is

concentrated in that period. Propensity_Unidentified dominates Propensity_Identified in

driving the declining trend in actual tax payments, with the effect of a larger –θt in Equation

(5), which measures the deviation of ROA’s coefficient in a time window from the statutory

tax rate. The changes in –θt generate a trend of -0.00028 in tax payments and explain 92.97%

of the trend of TAX_AT in 1988-2013. In other words, there might be an increasing number of

unidentified strategies used by firms for tax saving beyond the traditional approaches

captured by the firm characteristics (except for ROA). This may, in turn, drives the coefficient

of ROA away from the statutory tax rate. With regard to Propensity_Identified, three

firm-level factors stand out. The changes in the coefficients of LEV, RND, and INTAN explain

10.48, 18.73, and 19.90% of the trend of TAX_AT in 1988-2013, suggesting that either firms

have been managing debt, R&D investment, and intangible assets to be more eligible for tax

savings, or government has been providing more tax deductions or credits for firms holding

innovative investments.

3.4 Sub-sample tests

The findings reported in Section 3.3 show that a decreasing propensity to pay taxes,

22

especially the unidentified portion, plays a major role for the downward trend in tax

payments since 1988. This trend of unidentified propensity can either be due to the

availability of more unobserved opportunities for firms to reduce their tax burden, or more

likely firms’ decreasing willingness to pay taxes (i.e., increasing motivations for tax saving).

We are particularly interested in the trend of Propensity_Unidentified, because it is very

relevant to whether tax enforcement should be tightened. In this section, we provide some

insights into why firms have become more aggressive about tax saving by examining whether

the downward trend is pervasive across all firms, or limited to (or more evident in) particular

sub-sets of firms. To this end, we estimate annual regressions between 1991 and 2013 based

on Equation (6)8 and reproduce the analysis on Propensity_Unidentified in Panel A of Table

3 for different sub-samples, divided according to factors that are related to tax-saving

motivations in 1991-2013, using 1988-1990 as the base period. 9 We report the

Propensity_Unidentified for different groups of firms in Table 4 and plot the

Propensity_Unidentified for each sub-samples in Figure 5. In addition, we apply chaw test to

check whether there is significant difference in the trend of Propensity_Unidentified between

different groups and report the p-value in the bottom row of Table 4.

3.4.1 Multinational vs. domestic firms

8 Standard errors in annual regressions are clustered at the firm level to alleviate concerns over residual serial correlation. 9 For the sub-sample based on corporate governance, we use 1990 as the base year, constrained by data availability for the G-index.

23

There have been growing concerns about the tax avoidance activities of multinational

firms (Dyreng et al., 2016). Empirical evidence has shown that U.S. firms have become more

active in shifting income out of the United States (Klassen and Laplante, 2012), and that

multinational firms have lower global effective tax rates than domestic firms (Rego, 2003).

Nonetheless, Dyreng et al. (2016) find that the decline in the effective tax rate of

multinational firms is similar to that of domestic firms. We focus on the unidentified

propensity to pay taxes and analyze whether the decline is mainly driven by multinational

firms. We divide our sample into multinational and domestic firms for each year after 1988

and reproduce the analysis in Panel A of Table 3, only reporting Propensity_Unidentified for

the two sub-samples in columns 1 and 2 of Table 4. We classify a firm as multinational in

year t if either its pretax foreign income (COMPUSTAT item PIFO) or the absolute value of

its foreign tax expense (COMPUSTAT item TXFO) is greater than zero. Table 4 shows that

both domestic and multinational firms have experienced a significantly declining trend in

their unidentified propensity to pay taxes, but the magnitude of the declining trend of

multinational firms is significantly greater (Trend = -0.0004) than that of domestic firms

(Trend = -0.0003), with a p-value of chaw test equal to 0.042.

3.4.2 Top profitable firms

As Manzon and Plesko (2002) argue, more profitable firms can make more efficient use

of tax deductions, credits, and exemptions than less profitable firms. Moreover, earnings

24

become concentrated in a small number of U.S. corporations (DeAngelo, DeAngelo, and

Skinner, 2004). In our sample, the 30 firms with the highest pretax income account for

around 50% of the total pretax income. Thus, it is meaningful to investigate whether the

decrease in Propensity_Unidentified is concentrated in firms with large earnings numbers.

We present Propensity_Unidentified by year in columns 3 and 4 of Table 4 for the 30 firms

with the highest earnings and the rest of the sample, respectively. The decreasing trend in

Propensity_Unidentified is significantly more pronounced among the top 30 profitable firms

(-0.0011) than in the other firms (-0.0003), with a p-value of chaw test equal to 0.038.

3.4.3 Corporate governance

Recent studies examining the link between corporate governance and tax avoidance

provide evidence that the variation in corporate governance explains the cross-sectional

differences in the level of tax avoidance. Desai et al. (2007) argue that self-interested

managers can structure firms in complex ways to facilitate transactions that reduce corporate

taxes and divert corporate resources for their private interests. Wilson (2009) states that tax

sheltering can be a tool for wealth creation for shareholders in well-governed firms but not in

poorly governed firms. Armstrong et al. (2015) observe a positive relation between corporate

governance and tax avoidance in the lower tail of the tax avoidance distribution, and a

negative relation in the upper tail. We investigate whether corporate governance influences

the time trend of tax saving. We use the G-index constructed by Gompers, Ishii, and Metrick

25

(2003) as our proxy for corporate governance. The G-index is a measure of managerial

entrenchment. Firms with a high G-index value are considered as having more entrenched

management and thus weaker corporate governance. We divide our sample from 1990 to

2010 into quartiles for each industry-year (based on two-digit SIC codes) according to the

strength of corporate governance. Columns 5 and 6 of Table 4 report annual

Propensity_Unidentified for quartiles with the strongest and weakest corporate governance.

Both quartiles experienced a significant decrease in Propensity_Unidentified between 1988

and 2010, but the downward trend was more pronounced in strongly governed firms than in

poorly governed firms (-0.0005 vs. -0.0004), with a p-value of chaw test equal to 0.042.

3.4.4 Earnings per share

The literature also shows that managers engage in tax planning specifically with the

objective of improving accounting outcomes (Desai and Dharmapala, 2009; Robinson, Sikes,

and Weaver, 2010; Shackelford, Slemrod, and Sallee, 2011; Graham, Hanlon, Shevlin, and

Shroff, 2014). To test whether the downward trend in an unidentified propensity to pay taxes

is driven by financial reporting incentives, we divide our sample according to whether a

firm’s reported EPS increases in the current year from the previous year.10 Graham et al.

(2014) find that a reported EPS increase is a very important signal of tax planning. Columns

7 and 8 of Table 4 present the evolution of Propensity_Unidentified among firms with

10 We use reported EPS (COMPUSTAT item EPSPX) divided by Share Adjustment Factor (COMPUSTAT item AJEX) in year t minus (EPSPX/AJEX) in year t-1 as the measure for an EPS increase/decrease.

26

increased and decreased EPS. The magnitude of the decreasing trend in

Propensity_Unidentified for firms with increased EPS (Trend = -0.0005) is significantly

greater than that for firms with decreased EPS (Trend = -0.0001), with a p-value of chaw test

equal to 0.004.

3.4.5 Cash flow volatility

According to precaution theory for holding cash, firms with greater cash flow volatility

are motivated to hold more cash. Bates et al. (2009) find that the increase in cash ratio in

1980-2006 is concentrated in firms that experience the greatest increase in cash flow

volatility. It is possible that firms with high cash flow volatility have stronger motivations to

save taxes as a way of accumulating cash. We test whether this consideration sheds light on

firms’ decreasing unidentified propensity to pay taxes by calculating Propensity_Unidentified

for firms with high and low cash flow volatility. We follow Bates et al. (2009) to measure

cash flow volatility. For each firm-year, we compute the standard deviation of cash flow to

assets ratio11 for the previous 10 years and require that each firm have at least three

observations. We divide our sample into quartiles for each industry-year by cash flow

volatility. Columns 9 and 10 of Table 4 present Propensity_Unidentified for the top and

bottom quartiles. The time trend of Propensity_Unidentified is significantly larger in the top

(-0.0008) than in the bottom (-0.0005) quartile, with a p-value of chaw test equals to 0.000. 11 We use net cash flow from operating activities (COMPUSTAT item OANCF) divided by total assets as cash flow to assets. If OANCF is missing, we replace it with operating income before depreciation (OIBDP) - interest expense (XINT) - tax expense (TXT) - dividends (DVC).

27

3.4.6 Changes in cash holdings

Similar to Sub-section 3.4.5, we estimate Equation (6) annually for quartiles divided

according to the change in cash holdings in each industry-year. Columns 11 and 12 of Table

4 report the annual Propensity_Unidentified of the top and bottom quartiles. The firms with

the largest increases in cash holdings exhibit a greater decline in Propensity_Unidentified

(Trend = -0.0004), which is two times as big as the firms with the highest reductions in cash

holdings (Trend = -0.0002), with a p-value of chaw test equal to 0.008.

3.4.7 Future financing needs

Following the previous two sub-sections, tax planning can also provide financing for

future investment needs. We divide our sample into four quartile sub-samples according to

the level of future financing needs. We measure future financing needs by the ratio of capital

investment12 over total assets in year t+1. Columns 13 and 14 of Table 4 show that the

Propensity_Unidentified of the firms with the greatest future financing needs have a

significantly greater downward trend (Trend = -0.0005) than the firms in the lowest quartile

(Trend = -0.0003), with a p-value of chaw test equal to 0.009.

3.4.8 A summary of the sub-sample analyses

The sub-samples are constructed based on factors related to tax-saving motivations, and

we find that the declining trend in Propensity_Unidentified is ubiquitous across all of the 12 The capital investment level is calculated as the sum of capital expenditure (COMPUSTAT item CAPX) and acquisition (COMPUSTAT item AQC).

28

sub-samples. We also find that the trend is more pronounced in some sub-samples, implying

that the importance of these factors in tax-saving decisions has been growing. First, the

propensity to pay taxes exhibited by multinational corporations and corporations with

large-number earnings declined faster in 1988-2013, suggesting stricter tax enforcement

among these tax payers. Second, strong corporate governance seems to increasingly enable

managers to save taxes for shareholders. Third, corporations have been, to a larger extent,

relying on tax savings to increase earnings numbers. Finally, tax savings have become an

increasingly important source of financing for buffering cash flow shocks and investment

needs.

4. Robustness tests

An alternative explanation for the declining trend of the unidentified propensity is the

changes of firms’ industry attribute. To rule out this concern, we divide our sample into

subsamples according to Fama French 12 industry classification and then estimate Equation

(6) for each industry over the period of 1988 – 2013. Table 5 reports the

Propensity_Unidentified for each Fama French 12 Industry13 and shows that the declining

trend in Propensity_Unidentified is ubiquitous across different industries, suggesting that the

declining trend is not driven by changes in the composition of firms from different industries

and is due to firms’ declining propensity to pay taxes unexplained by book-tax related firm

13 We exclude Fama French 8 – Utilities and 11 – Financial industries in order to align with our sample selection.

29

characteristics in the literature.

5. Conclusion

We examine U.S. firms’ tax payments in 1956-2013 and find that the ratio of income tax

over total assets (TAX_AT) continually decreases by around 7 basis points annually. We

decompose this trend into three components: changes in firm characteristics, the statutory tax

rate, and firms’ propensity to pay taxes. We find that in 1961-2013, 36.09, 52.44, and 11.47%

of the declining trend in TAX_AT result from changes in firm characteristics, the statutory tax

rate, and the propensity to pay taxes, respectively. More importantly, we observe a structural

change in firms’ tax paying trend. Before 1988, the trend was mainly driven by changes in

firm characteristics and the statutory tax rate, whereas since 1988, a decreasing propensity to

pay taxes played a major role. Not only does this study confirm the observation made by

policy makers and scholars that corporations have been more aggressive in their tax savings,

but it also reveals that the recent decline in tax payment is not driven by changing firm

characteristics, but rather by a growing propensity to avoid taxes, which suggests stricter tax

enforcement.

Further, we find that the decreasing trend in corporate tax payments is prevalent among

firms regardless of their multinationality, earnings scale, corporate governance strength,

earnings management, and cash demand. However, the declining trend in tax payment is

more pronounced among corporations with multinational operations, high earnings, strong

30

governance, and a high demand for earnings management and cash. These findings provide

possible explanations for the declining trend in tax payments and insights for policy makers.

31

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Bates, T. W., Kahle, K. M., Stulz, R. M., 2009. Why do U.S. firms hold so much more cash than they used to? The Journal of Finance 64 (5), 1985–2021.

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Dyreng, S. D., Hanlon, M., Maydew, E. L., Thornock, J. R., 2016. Changes in corporate effective tax rates over the past twenty-five years. Unpublished working paper. Duke University.

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Figure 1 – Annual Effective Tax Rate

This figure plots the average annual effective tax rate (ETR) of profitable U.S. public firms from 1956 to 2013. ETR is measured as total income taxes (COMPUSTAT item TXT) divided by pre-tax income (COMPUSTAT item PI).

34

Figure 2 – Annual Actual Tax Payment Relative to Total Assets

This figure plots the average annual TAX_AT of profitable U.S. public firms from 1956 to 2013. TAX_AT is measured as total income taxes (COMPUSTAT item TXT) divided by total assets (COMPUSTAT item AT).

35

Figure 3 – Actual Tax Payment, Expected Tax Payment due to Changing Firm Characteristics, and Total Expected Tax Payment

This figure plots the mean of actual tax payment (TAX_AT), expected tax payment due to changing firm characteristics (Expected_Tax_Firm), and total expected tax payment (Expected_Tax) of every three-year window of sample period 1961 to 2013. Refer to Table 3 Panel A for variable definitions.

36

Figure 4 – Firms’ Propensity to Pay Taxes

This figure plots for firms’ propensity to pay taxes (Propensity). Refer to Table 3 Panel A for variable definitions

37

Figure 5 – Unidentified Propensity to Pay Tax for Different Sub-samples This figure plots firms’ unidentified propensity (Propensity_Unidentied), i.e., firms’ propensity to pay taxes unrelated to identified tax saving related firm characteristics, for various sub-samples. Refer to Table 3 Panel A for variable definition. We plot Propensity_Unidentied separately for multinational vs. domestic firms (Panel A), the top 30 vs. non-top 30 profitable firms (Panel B), top vs. bottom corporate governance quartiles (Panel C), firms with increased vs. decreased EPS (Panel D), top vs. bottom cash flow volatility quartiles (Panel E), top vs. bottom changes in cash holding quartiles (Panel F), and top vs. bottom future financing needs quartiles (Panel G) of 1991-2013 period. We classify a firm as multinational in year t if either its pretax foreign income (COMPUSTAT item PIFO) or the absolute value of its foreign tax expense (COMPUSTAT item TXFO) is greater than zero. Pretax income is the proxy for firms’ profitability. Gompers, Ishii, and Metrick (2003)’s G-index is the proxy for corporate governance. EPS increase/decrease is measured as reported EPS (COMPUSTAT item EPSPX) divided by Share Adjustment Factor (COMPUSTAT item AJEX) in year t minus (EPSPX/AJEX) in year t-1. Cash flow volatility is measured as the standard deviation of cash flow to assets ratio (COMPUSTAT item OANCF divided by item AT) of the past 10 years. Change in cash is measured as cash (COMPUSTAT item CHE) in year t minus that in year t-1 over total assets in year t. Future financing needs is measured as the ratio of capital investment over total assets(COMPUSTAT item CAPX plus item AQC divided by item AT) in year t+1. Quartiles are based on the corresponding variable for each two-digit SIC industry-year. Panel A Panel B Panel C Panel D

Panel E Panel F Panel G

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Appendix 1 Descriptive Statistics

This table reports the descriptive statistics on the profitable U.S. public firms from 1956 to 2013. TAX_AT is actual tax payment, measured as total income taxes (COMPUSTAT item TXT) divided by total assets (COMPUSTAT item AT). ROA is return on assets, calculated as pre-tax income (COMPUSTAT item PI) divided by total assets. LEV is leverage, constructed as the ratio of total debt (COMPUSTAT item DLTT plus DLC) to total assets. RND is the ratio of research and development expense (COMPUSTAT item XRD) to total assets. PPE is constructed as the ratio of total property, plants, and equipment (COMPUSTAT item PPENT) to total assets. INTAN is calculated as the ratio of intangible assets (COMPUSTAT item INTAN) to total assets. EQINC is equity income in earnings, computed as the ratio of equity income in earnings (COMPUSTAT item ESUB) to total assets. ΔNOL is the change in a firm’s net operating loss carryforward (COMPUSTAT item TLCF) in year t-1 divided by total asset. CAPX is the capital expenditures, measured as capital assets (COMPUSTAT item CAPX) divided by total assets. SPI is the special items, measured as special items (COMPUSTAT item SPI) divided by total assets.

N Mean Min P25 Median P75 Max STD

TAX_AT 153,949 0.043 -0.018 0.015 0.035 0.062 0.181 0.038

ROA 153,949 0.113 0.003 0.052 0.095 0.154 0.417 0.083

LEV 153,949 0.222 0.000 0.064 0.205 0.339 0.709 0.178

RND 153,949 0.019 0.000 0.000 0.000 0.018 0.206 0.040

PPE 153,949 0.317 0.007 0.144 0.269 0.445 0.906 0.223

INTAN 153,949 0.067 0.000 0.000 0.002 0.068 0.622 0.128

EQINC 153,949 0.001 -0.006 0.000 0.000 0.000 0.028 0.004

ΔNOL 153,949 -0.004 -0.246 0.000 0.000 0.000 0.199 0.044

CAPX 153,949 0.071 0.000 0.025 0.059 0.093 0.378 0.070

SPI 153,949 -0.001 -0.057 0.000 0.000 0.000 0.080 0.014

39

Table 1: Triennial Regressions Panel A: Sub-period Sample from 1961 to 1987 This table reports the regression estimates of Equation (6) estimated for every three-year window from 1961 to 1987. The variables are defined in Appendix 1. TAX_ATi,t = Interceptt + (Tt - θt) × ROAi,t + β1,t × LEVi,t + β2,t × RNDi,t + β3,t × PPEi,t + β4,t × INTANi,t + β5,t × EQINCi,t + β6,t × ∆NOLi,t + β7,t × CAPXi,t + β8,t × SPIi,t + ɛi,t (6)

Dependent variable: TAX_AT

Regression time window: Pred. Sign 61-63 64-66 67-69 70-72 73-75 76-78 79-81 82-84 85-87

ROA + 0.499 0.468 0.484 0.489 0.476 0.480 0.462 0.456 0.427

(168.04) (171.90) (227.32) (331.48) (317.51) (307.57) (297.03) (277.23) (218.94)

LEV - -0.00202 -0.000827 0.00286 0.00385 0.00185 0.00433 0.00227 0.000831 -0.00147

(-1.27) (-0.57) (2.58) (5.39) (2.36) (5.52) (2.82) (1.01) (-1.62)

RND - 0.00361 -0.0144 -0.00680 -0.00576 -0.00279 -0.00798 -0.0139 -0.0578 -0.0320

(0.28) (-1.45) (-0.84) (-1.31) (-0.67) (-1.92) (-3.44) (-16.43) (-8.32)

PPE - -0.00810 -0.0120 -0.0128 -0.00675 -0.00442 -0.000426 0.000197 0.00191 -0.000275

(-6.52) (-10.73) (-14.49) (-11.23) (-6.39) (-0.62) (0.29) (2.80) (-0.34)

INTAN ? 0.0107 -0.00154 0.00922 0.00519 0.0121 0.0147 0.0185 0.0166 0.0122

(2.12) (-0.37) (3.60) (3.70) (7.38) (7.67) (7.82) (7.04) (6.72)

EQINC - -0.504 -0.481 -0.538 -0.454 -0.542 -0.378 -0.393 -0.278 -0.277

(-8.28) (-8.45) (-12.63) (-18.53) (-22.66) (-15.19) (-17.02) (-10.66) (-8.35)

ΔNOL + 0.156 0.00878 0.0189 -0.00276 0.00479 0.0146 0.00448 -0.00256 -0.00140

(8.69) (0.90) (2.83) (-0.69) (1.83) (6.01) (1.45) (-0.73) (-0.42)

CAPX - 0.0124 0.00986 0.00169 -0.0149 -0.0298 -0.0408 -0.0331 -0.0310 -0.00847

(3.12) (3.04) (0.69) (-8.33) (-15.00) (-20.61) (-18.67) (-16.82) (-3.68)

SPI - 0.0538 -0.302 -0.163 0.0243 -0.0769 -0.151 -0.119 -0.108 -0.0482

(0.91) (-6.00) (-3.41) (0.89) (-5.48) (-13.11) (-12.64) (-11.59) (-5.06)

Intercept -0.00101 -0.000484 0.00108 -0.000334 0.000637 -0.00228 -0.00325 -0.00292 -0.000374

(-1.41) (-0.68) (1.93) (-0.94) (1.67) (-5.95) (-8.36) (-7.56) (-0.82)

40

Observations 3,502 5,084 7,005 8,247 10,214 12,029 10,876 9,935 9,493 R-Squared 0.917 0.898 0.918 0.952 0.935 0.915 0.916 0.906 0.864

41

Panel B: Sub-period Sample from 1988 to 2013 This table reports the regression estimates of Equation (6) estimated for every three-year window from 1988 to 2013. The variables are defined in Appendix 1. TAX_ATi,t = Interceptt + (Tt - θt) × ROAi,t + β1,t × LEVi,t + β2,t × RNDi,t + β3,t × PPEi,t + β4,t × INTANi,t + β5,t × EQINCi,t + β6,t × ∆NOLi,t + β7,t × CAPXi,t + β8,t × SPIi,t + ɛi,t (6)

Dependent variable: TAX_AT

Regression time window: Pred. Sign 88-90 91-93 94-96 97-99 00-02 03-05 06-08 09-11 12-13

ROA + 0.347 0.322 0.328 0.342 0.327 0.304 0.311 0.285 0.285

(161.86) (139.32) (139.16) (148.96) (118.69) (102.45) (105.89) (91.15) (70.48)

LEV - 0.000246 -0.00744 -0.00759 -0.00300 -0.00349 -0.00672 -0.00543 -0.00712 -0.00982

(0.25) (-7.01) (-6.65) (-2.75) (-2.79) (-4.67) (-3.48) (-4.42) (-5.10)

RND - -0.0321 -0.0313 -0.0467 -0.0418 -0.0578 -0.0843 -0.0663 -0.0928 -0.0660

(-8.57) (-8.28) (-12.38) (-11.46) (-11.84) (-16.75) (-12.49) (-16.84) (-8.99)

PPE - -0.00329 0.00181 0.000801 -0.00121 -0.000287 0.00423 0.00281 0.000541 5.97e-05

(-3.80) (1.90) (0.76) (-1.12) (-0.23) (2.94) (1.69) (0.33) (0.03)

INTAN ? 0.00706 0.0137 0.0142 0.0135 0.00931 0.0102 0.0104 0.00825 0.00595

(4.14) (8.58) (9.12) (10.51) (6.71) (7.44) (7.22) (5.62) (3.25)

EQINC - -0.230 -0.118 -0.326 -0.134 -0.0995 0.0447 -0.0563 -0.147 -0.147

(-5.62) (-2.23) (-6.84) (-2.88) (-1.98) (0.85) (-0.98) (-2.43) (-1.95)

ΔNOL + 0.0365 0.0482 0.0639 0.0579 0.0489 0.0265 0.0234 0.0280 0.0307

(12.27) (15.67) (16.01) (14.84) (12.06) (7.29) (5.68) (6.21) (5.57)

CAPX - 0.00557 -0.00214 0.0122 0.0176 0.00706 0.0121 0.00347 0.00542 0.0124

(1.99) (-0.69) (4.05) (5.38) (1.68) (2.44) (0.69) (0.98) (1.89)

SPI - -0.0910 -0.0856 -0.145 -0.143 -0.106 -0.174 -0.118 -0.0876 -0.0907

(-9.36) (-7.96) (-13.58) (-15.63) (-9.62) (-13.18) (-8.38) (-5.85) (-4.79)

Intercept 0.000491 0.00219 -0.000205 -0.00156 -8.71e-05 -0.00172 -0.00188 0.000337 0.00104

(0.99) (4.38) (-0.39) (-2.99) (-0.14) (-2.61) (-2.69) (0.45) (1.11)

Observations 9,125 9,661 11,725 10,669 7,811 8,112 7,213 6,500 4,117

42

R-squared 0.785 0.717 0.668 0.717 0.683 0.610 0.643 0.607 0.589

43

Table 2: Firm Characteristics Trends This table reports the mean of each variable of all sample firms in every three-year window from 1961 to 2013. We calculate the average annual change in each variable (Trend) by estimating a regression model with variables in each column (e.g., TAX_AT, ROA, and so on) as the dependent variable and Year as the independent variable. Trend is the coefficient on Year, where Year is the beginning year of each three-year window. Trend values that are significant at less than the 10% level are reported in bold. The variables are defined in Appendix 1.

Year TAX_AT ROA LEV RND PPE INTAN EQINC ΔNOL CAPX SPI

1961 0.0593 0.1266 0.1779 0.0042 0.3530 0.0137 0.0007 -0.0004 0.0504 0.0001 1964 0.0603 0.1390 0.2062 0.0048 0.3568 0.0170 0.0007 -0.0001 0.0656 0.0002 1967 0.0603 0.1304 0.2372 0.0045 0.3522 0.0270 0.0007 0.0000 0.0791 0.0001 1970 0.0519 0.1126 0.2486 0.0100 0.3494 0.0352 0.0010 -0.0001 0.0747 0.0000 1973 0.0556 0.1231 0.2502 0.0125 0.3367 0.0312 0.0012 -0.0057 0.0773 0.0001 1976 0.0553 0.1256 0.2486 0.0127 0.3428 0.0258 0.0011 -0.0089 0.0790 0.0005 1979 0.0509 0.1237 0.2470 0.0138 0.3536 0.0194 0.0013 -0.0047 0.0928 0.0017 1982 0.0456 0.1129 0.2241 0.0186 0.3494 0.0199 0.0011 -0.0018 0.0870 0.0014 1985 0.0435 0.1065 0.2412 0.0204 0.3284 0.0351 0.0009 -0.0035 0.0800 0.0014 1988 0.0349 0.1035 0.2428 0.0231 0.3292 0.0446 0.0007 -0.0077 0.0731 0.0010 1991 0.0326 0.0997 0.2159 0.0255 0.3144 0.0545 0.0005 -0.0089 0.0668 -0.0009 1994 0.0342 0.1079 0.2084 0.0282 0.3015 0.0649 0.0007 -0.0032 0.0747 -0.0018 1997 0.0353 0.1064 0.2176 0.0280 0.2846 0.0946 0.0006 -0.0018 0.0693 -0.0026 2000 0.0311 0.0974 0.2210 0.0238 0.2895 0.1228 0.0007 -0.0015 0.0590 -0.0020 2003 0.0290 0.1001 0.1847 0.0267 0.2545 0.1572 0.0009 -0.0004 0.0515 -0.0021 2006 0.0320 0.1083 0.1827 0.0264 0.2477 0.1780 0.0009 -0.0044 0.0580 -0.0024 2009 0.0278 0.1022 0.1792 0.0260 0.2484 0.1860 0.0009 -0.0008 0.0471 -0.0031 2012 0.0276 0.0984 0.1983 0.0240 0.2608 0.1943 0.0009 -0.0018 0.0551 -0.0038

Trend (61-13) -0.0007 -0.0007 -0.0007 0.0005 -0.0023 0.0036 0.0000 0.0000 -0.0004 -0.0001

44

Table 3: Actual Tax Payment, Expected Tax Payment, and Propensity to Pay Taxes

Panel A: Actual Tax Payment, Expected Tax Payment, and Propensity to Pay Taxes across Three-year Windows

This table reports actual tax payment, expected tax payment, and propensity to pay taxes of all sample firms for every three-year window of 1961-2013 period. TAX_AT is the actual tax payment, measured as total income taxes divided by total assets. The expected tax payment (Expected_Tax) captures the effects of changes in both firm characteristics and the statutory tax rate. It is the sum of two components: Expected_Tax_Firm and Expected_Tax_Rate. Expected_Tax_Firm captures the trend in expected tax payment due to the changing firm characteristics. It is measured as the sum of the coefficients of Equation (6), estimated using the base period (1956-1960) data multiplied by their corresponding contemporary firm characteristics averaged for every three-year window (e.g., 1961-1963, and so on). TAX_ATi,t = Interceptt + (Tt - θt) × ROAi,t + β1,t × LEVi,t + β2,t × RNDi,t + β3,t × PPEi,t + β4,t × INTANi,t + β5,t × EQINCi,t + β6,t × ∆NOLi,t + β7,t × CAPXi,t + β8,t × SPIi,t + ɛi,t (6) Expected_Tax_Rate captures the trend in expected tax payment due to the changing statutory tax rate. It is measured as the difference in contemporary statutory tax rate and the coefficient on ROA estimated from the base period and multiplied by the contemporary ROA averaged for every three-year window. The propensity to pay taxes (Propensity) is the difference between TAX_AT and Expected_Tax. It captures firms’ propensity to pay taxes due to the changes in the coefficients of firm characteristics and other unidentified factors associated with tax payment. It is the sum of two components: Propensity_Identied and Propensity_Unidentified. Propensity_Identied is the identified propensity. It captures the changes in the coefficients of firm characteristics and is measured as the difference between the coefficients of Equation (6) estimated over a contemporary three-year window and those estimated over the base period multiplied by the contemporary firm characteristics. Propensity_Unidentied is the unidentified propensity. It captures firms’ propensity to pay taxes that cannot be explained by the changes in the coefficients. It is measured as the intercept estimated over contemporary three-year window minus the difference in the coefficient on ROA of the contemporary three-year window and that of the base period times the mean of the ROA of the three-year window. We calculate the average annual change of each variable (Trend) by estimating a regression model with variables in each column (e.g., TAX_AT, Expected_Tax_Firm, and so on) as the dependent variable and Year as the independent variable. Trend is the coefficient on Year, where Year is the beginning year of each three-year window. We also calculate the percentage of Trend of each column relative to Trend in actual tax payment (%) for the full sample and sub-period samples 1961-1987 and 1988-2013, respectively. Trend values that are significant at less than the 10% level are reported in bold.

Actual Tax Payment

Expected Tax Payment

Propensity to Pay Taxes

Year TAX_AT Expected_Tax

_Firm Expected_Tax

_Rate Expected

_Tax Propensity_Identified

Propensity_Unidentified Propensity

1961 0.0593 0.0632 0.0000 0.0632 0.0021 -0.0060 -0.0039 1964 0.0603 0.0697 -0.0028 0.0669 0.0006 -0.0072 -0.0066 1967 0.0603 0.0654 -0.0052 0.0602 0.0008 -0.0007 0.0001 1970 0.0519 0.0562 -0.0034 0.0528 0.0018 -0.0027 -0.0010 1973 0.0556 0.0619 -0.0049 0.0569 0.0008 -0.0022 -0.0013 1976 0.0553 0.0631 -0.0050 0.0581 0.0018 -0.0046 -0.0028 1979 0.0509 0.0616 -0.0074 0.0541 0.0020 -0.0053 -0.0032 1982 0.0456 0.0560 -0.0068 0.0492 0.0020 -0.0057 -0.0036 1985 0.0435 0.0534 -0.0064 0.0470 0.0027 -0.0062 -0.0035

45

1988 0.0349 0.0521 -0.0186 0.0335 0.0024 -0.0011 0.0014 1991 0.0326 0.0506 -0.0180 0.0327 0.0019 -0.0019 -0.0001 1994 0.0342 0.0549 -0.0184 0.0366 0.0025 -0.0049 -0.0024 1997 0.0353 0.0548 -0.0181 0.0367 0.0033 -0.0047 -0.0014 2000 0.0311 0.0504 -0.0166 0.0339 0.0019 -0.0046 -0.0027 2003 0.0290 0.0526 -0.0170 0.0356 0.0020 -0.0086 -0.0066 2006 0.0320 0.0574 -0.0184 0.0390 0.0013 -0.0084 -0.0070 2009 0.0278 0.0542 -0.0174 0.0369 -0.0005 -0.0086 -0.0091 2012 0.0276 0.0523 -0.0167 0.0356 -0.0004 -0.0076 -0.0080

Trend (61-87) -0.00068 -0.00045 -0.00024 -0.00069 0.00005 -0.00004 0.000010 % (61-87) 100% 66.00% 35.51% 101.51% -7.26% 5.89% -1.51% Trend (88-13) -0.00030 0.00008 0.00006 0.00014 -0.00012 -0.00032 -0.00044 % (88-13) 100% -26.30% -18.88% -45.19% 39.92% 105.63% 145.19% Trend (61-13) -0.00074 -0.00027 -0.00039 -0.00065 -0.00001 -0.000075 -0.00008 % (61-13) 100% 36.09% 52.44% 88.53% 1.25% 10.23% 11.47%

46

Panel B: Breaking Down the Expected Tax Payment

This table reports the estimated expected tax payment by each firm characteristic, i.e., coefficient on each firm characteristic variable of Equation (6) estimated over the base period, multiplied by its contemporary firm characteristic averaged over every three-year window (e.g., 1961-1963, and so on). Intercept0 and βn,0 are estimated from the base period (1956-1960). TAX_ATi,t = Interceptt + (Tt - θt) × ROAi,t + β1,t × LEVi,t + β2,t × RNDi,t + β3,t × PPEi,t + β4,t × INTANi,t + β5,t × EQINCi,t + β6,t × ∆NOLi,t + β7,t × CAPXi,t + β8,t × SPIi,t + ɛi,t (6) T0 is the statutory tax averaged over the base period. ΔTt is the difference between the contemporary statutory tax averaged over every subsequent three-year window and T0. We then estimate a regression model with variables in each column as the dependent variable and Year as the independent variable. Trend is the coefficient on Year, where Year is the beginning year of each three-year window. We also calculate the percentage of Trend of each column relative to Trend in actual tax payment (%) for the full sample and sub-period samples 1961-1987 and 1988-2013, respectively. Trend values that are significant at less than the 10% level are reported in bold.

Year

Expected_Tax _Rate

Expected_Tax _Firm

ΔTt×ROAt Intercept0 T0×ROAt β1,0×LEVt β2,0×RNDt β3,0×PPEt β4,0×INTANt β5,0×EQINCt β6,0×ΔNOLt β7,0×CAPXt β8,0×SPIt

1961 0.00000 0.00229 0.06585 0.00036 -0.00005 -0.00512 0.00020 -0.00040 0.00002 0.00002 0.00000

1964 -0.00278 0.00229 0.07230 0.00042 -0.00006 -0.00517 0.00025 -0.00039 0.00001 0.00003 0.00000 1967 -0.00521 0.00229 0.06779 0.00048 -0.00005 -0.00511 0.00039 -0.00040 0.00000 0.00003 0.00000 1970 -0.00338 0.00229 0.05857 0.00051 -0.00011 -0.00507 0.00051 -0.00054 0.00001 0.00003 0.00000 1973 -0.00492 0.00229 0.06401 0.00051 -0.00014 -0.00488 0.00046 -0.00063 0.00021 0.00003 0.00000 1976 -0.00502 0.00229 0.06531 0.00051 -0.00014 -0.00497 0.00038 -0.00062 0.00034 0.00003 -0.00001 1979 -0.00742 0.00229 0.06431 0.00050 -0.00016 -0.00513 0.00028 -0.00073 0.00018 0.00004 -0.00003 1982 -0.00677 0.00229 0.05870 0.00046 -0.00021 -0.00507 0.00029 -0.00058 0.00007 0.00003 -0.00002 1985 -0.00639 0.00229 0.05540 0.00049 -0.00023 -0.00476 0.00051 -0.00047 0.00013 0.00003 -0.00002 1988 -0.01862 0.00229 0.05380 0.00050 -0.00026 -0.00477 0.00065 -0.00039 0.00029 0.00003 -0.00002 1991 -0.01795 0.00229 0.05184 0.00044 -0.00029 -0.00456 0.00080 -0.00026 0.00034 0.00003 0.00001 1994 -0.01835 0.00229 0.05613 0.00043 -0.00032 -0.00437 0.00095 -0.00036 0.00012 0.00003 0.00003 1997 -0.01808 0.00229 0.05531 0.00044 -0.00032 -0.00413 0.00138 -0.00033 0.00007 0.00003 0.00004 2000 -0.01655 0.00229 0.05063 0.00045 -0.00027 -0.00420 0.00179 -0.00040 0.00006 0.00002 0.00003 2003 -0.01702 0.00229 0.05207 0.00038 -0.00030 -0.00369 0.00229 -0.00049 0.00001 0.00002 0.00003 2006 -0.01842 0.00229 0.05633 0.00037 -0.00030 -0.00359 0.00260 -0.00050 0.00017 0.00002 0.00004 2009 -0.01737 0.00229 0.05314 0.00037 -0.00030 -0.00360 0.00272 -0.00047 0.00003 0.00002 0.00005 2012 -0.01672 0.00229 0.05115 0.00040 -0.00027 -0.00378 0.00284 -0.00050 0.00007 0.00002 0.00006

47

Trend (61-87) -0.000242 0 -0.00046 0.00000 -0.00001 0.00001 0.00001 -0.00001 0.00001 0.00000 -0.00000 % (61-87) 35.51% 0 67.40% -0.54% 1.18% -1.47% -0.84% 1.28% -1.09% -0.07% 0.15%

Trend (88-13) 0.000057 0 -0.00005 -0.00000 -0.000000 0.000049 0.000104 -0.000008 -0.00001 -0.00000 0.00000 % (88-13) -18.88% 0 17.59% 1.40% 0.01% -16.27% -34.47% 2.75% 3.28% 0.13% -0.72%

Trend (61-13) -0.00039 0 -0.00035 -0.000002 -0.00001 0.00003 0.00005 0.00000 0.000000 -0.000000 0.000001 % (61-13) 52.44% 0 47.29% 0.21% 0.76% -4.61% -7.21% -0.16% -0.04% 0.02% -0.16%

48

Panel C: Breaking Down the Propensity to Pay Taxes This table reports firms’ propensity to pay tax by each firm characteristic, i.e., the difference between the coefficient on each firm characteristic variable of Equation (6) estimated over the contemporary three-year window (e.g., 1961-1963, and so on), then that estimated over the base period (1956-1960) multiplied by its corresponding contemporary firm characteristic. TAX_ATi,t = Interceptt + (Tt - θt) × ROAi,t + β1,t × LEVi,t + β2,t × RNDi,t + β3,t × PPEi,t + β4,t × INTANi,t + β5,t × EQINCi,t + β6,t × ∆NOLi,t + β7,t × CAPXi,t + β8,t × SPIi,t + ɛi,t (6) The difference between the coefficient estimated over the base period and that of each three-year window is represented by Δ. θt is the coefficient on ROA for each three-year window. We then estimate a regression model with variables in each column as the dependent variable and Year as the independent variable. Trend is the coefficient on Year, where Year is the beginning year of each three-year window. We also calculate the percentage of Trend of each column relative to Trend in actual tax payment (%) for the full sample and sub-period samples 1961-1987 and 1988-2013, respectively. Trend values that are significant at less than the 10% level are reported in bold.

Propensity

_Unidentified Propensity _Identified

Year ΔInterceptt -θt×ROAt Δβ1,t×LEVt Δβ2,t×RNDt Δβ3,t×PPEt Δβ4,t×INTANt Δβ5,t×EQINCt Δβ6,t×ΔNOLt Δβ7,t×CAPXt Δβ8,t×SPIt

1961 -0.00330 -0.00266 -0.00072 0.00006 0.00226 -0.00005 0.00003 -0.00008 0.00061 0.00001 1964 -0.00277 -0.00445 -0.00059 -0.00001 0.00089 -0.00027 0.00005 -0.00001 0.00062 -0.00007 1967 -0.00121 0.00052 0.00019 0.00002 0.00060 -0.00015 0.00000 -0.000002 0.00010 -0.00001 1970 -0.00262 -0.00011 0.00045 0.00006 0.00271 -0.00033 0.00009 -0.000004 -0.00114 -0.0000001 1973 -0.00165 -0.00049 -0.00005 0.00011 0.00339 -0.00008 0.000001 -0.00024 -0.00233 -0.000004 1976 -0.00457 0.00000 0.00057 0.00004 0.00482 0.00000 0.00019 -0.00047 -0.00325 -0.00007 1979 -0.00554 0.00025 0.00006 -0.00003 0.00520 0.00008 0.00020 -0.00020 -0.00311 -0.00017 1982 -0.00521 -0.00045 -0.00027 -0.00086 0.00573 0.00004 0.00028 -0.00006 -0.00273 -0.00013 1985 -0.00266 -0.00352 -0.00085 -0.00042 0.00467 -0.00008 0.00023 -0.00013 -0.00071 -0.00005 1988 -0.00180 0.00072 -0.00044 -0.00048 0.00369 -0.00034 0.00023 -0.00057 0.00038 -0.00008 1991 -0.00010 -0.00179 -0.00205 -0.00051 0.00513 -0.00005 0.00020 -0.00077 -0.00017 0.00007 1994 -0.00250 -0.00237 -0.00201 -0.00099 0.00461 -0.00003 0.00014 -0.00033 0.00088 0.00023 1997 -0.00385 -0.00085 -0.00110 -0.00085 0.00378 -0.00010 0.00025 -0.00017 0.00119 0.00033 2000 -0.00238 -0.00224 -0.00122 -0.00110 0.00411 -0.00065 0.00033 -0.00013 0.00039 0.00018 2003 -0.00401 -0.00461 -0.00162 -0.00195 0.00477 -0.00069 0.00053 -0.00002 0.00060 0.00033 2006 -0.00417 -0.00422 -0.00136 -0.00145 0.00429 -0.00075 0.00045 -0.00027 0.00018 0.00025 2009 -0.00195 -0.00664 -0.00164 -0.00212 0.00374 -0.00118 0.00034 -0.00005 0.00024 0.00023 2012 -0.00125 -0.00639 -0.00235 -0.00131 0.00380 -0.00168 0.00036 -0.00012 0.00066 0.00029

49

Trend (61-87) -0.000085 0.000045 0.000002 -0.000026 0.000197 0.000009 0.000011 -0.000007 -0.000133 -0.000005 % (61-87) 12.52% -6.62% -0.25% 3.74% -28.90% -1.30% -1.64% 0.99% 19.42% 0.67%

Trend (88-13) -0.000038 -0.000280 -0.000032 -0.000056 -0.000019 -0.000060 0.000010 0.000023 0.000002 0.000011 % (88-13) 12.66% 92.97% 10.48% 18.73% 6.28% 19.90% -3.42% -7.76% -0.64% -3.65%

Trend (61-13) 0.000008 -0.000083 -0.000043 -0.000040 0.000046 -0.000021 0.000008 -0.000002 0.000034 0.000008 % (61-13) -1.09% 11.32% 5.80% 5.47% -6.21% 2.81% -1.10% 0.25% -4.66% -1.09%

50

Table 4: Unidentified Propensity to Pay Tax for Different Groups of Firms This table reports firms’ unidentified propensity to pay taxes (Propensity_Unidentified) for multinational vs. domestic firms (Columns 1 and 2), the top 30 vs. non-top 30 profitable firms (Columns 3 and 4), corporate governance quartiles (Columns 5 and 6), firms with increased vs. decreased EPS (Columns 7 and 8), cash flow volatility quartiles (Columns 9 and 10), changes in cash holding quartiles (Columns 11 and 12), and future financing needs quartiles (Columns 13 and 14) in the 1991-2013 period.14 Trend measures the average annual change in Propensity_Unidentified. It is the coefficient of regressing Propensity_Unidentified on Year. Trend that are significant at less than the 10% level are reported in bold. We apply chaw test to check whether the difference in Trend of Propensity_Unidentified between different groups is significant and report the p-value in the bottom row. Refer to Figure 5 for definitions of sample classification variables and Table 3 Panel A for definition of Propensity_Unidentifieds.

Multinational vs. domestic firms

Top profitable firms

Corporate governance

EPS increase vs. decrease CFO volatility

Change in cash holdings

Future financing needs

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

Year Multi Domestic Top 30 Non-Top

30 Upper Lower Increase Decrease Upper Lower Upper Lower Upper Lower

1991 0.0012 -0.0004 -0.0083 -0.0003 0.0055 0.0012 -0.0076 -0.0082 0.0136 0.0174 -0.0033 -0.0004 0.0029 -0.0020 1992 0.0032 0.0011 0.0385 0.0015 0.0084 0.0057 -0.0049 -0.0065 0.0152 0.0159 -0.0004 0.0027 0.0041 0.0009 1993 0.0028 -0.0029 -0.0053 -0.0019 0.0083 0.0028 -0.0068 -0.0058 0.0159 0.0157 -0.0046 -0.0005 -0.0033 -0.0020 1994 0.0006 -0.0024 0.0169 -0.0019 0.0034 0.0045 -0.0096 -0.0069 0.0139 0.0150 -0.0054 -0.0002 -0.0025 -0.0017 1995 0.0008 -0.0041 0.0111 -0.0032 0.0040 0.0004 -0.0078 -0.0069 0.0122 0.0142 -0.0077 0.0005 0.0002 -0.0050 1996 -0.0011 -0.0052 -0.0024 -0.0044 0.0039 0.0067 -0.0104 -0.0084 0.0120 0.0126 -0.0102 -0.0030 -0.0033 -0.0054 1997 0.0015 -0.0044 0.0018 -0.0033 0.0095 0.0057 -0.0103 -0.0065 0.0040 0.0079 -0.0070 -0.0024 -0.0031 -0.0046 1998 0.0013 -0.0045 0.0097 -0.0032 0.0092 0.0015 -0.0066 -0.0089 0.0004 0.0066 -0.0037 -0.0013 -0.0008 -0.0047 1999 0.0026 -0.0044 0.0112 -0.0028 0.0073 0.0015 -0.0064 -0.0092 0.0048 0.0056 -0.0019 -0.0035 -0.0022 -0.0041 2000 0.0028 -0.0042 0.0033 -0.0025 0.0044 0.0040 -0.0132 -0.0044 0.0056 0.0063 -0.0043 0.0029 0.0033 -0.0029 2001 0.0025 -0.0043 0.0030 -0.0026 0.0030 0.0046 -0.0134 -0.0050 0.0042 0.0070 -0.0043 -0.0012 -0.0004 -0.0052 2002 0.0002 -0.0049 0.0015 -0.0038 0.0029 0.0041 -0.0105 -0.0133 0.0006 0.0063 -0.0060 -0.0024 0.0013 -0.0018 2003 -0.0028 -0.0080 -0.0024 -0.0068 0.0065 0.0024 -0.0160 -0.0026 -0.0015 0.0087 -0.0119 -0.0039 0.0003 -0.0076 2004 -0.0069 -0.0054 0.0012 -0.0066 -0.0023 0.0001 -0.0138 -0.0111 -0.0003 0.0058 -0.0112 -0.0035 -0.0034 -0.0081 2005 -0.0038 -0.0083 0.0016 -0.0073 0.0009 -0.0027 -0.0176 -0.0069 -0.0022 0.0067 -0.0122 -0.0034 -0.0077 -0.0088

14 Except for the sub-sample tests based on corporate governance, in which we use 1990 as the base year because of data availability for the G-index.

51

2006 -0.0034 -0.0056 -0.0170 -0.0055 0.0006 -0.0009 -0.0122 -0.0113 0.0030 0.0055 -0.0085 -0.0044 -0.0066 -0.0036 2007 -0.0058 -0.0084 -0.0082 -0.0079 0.0002 -0.0018 -0.0146 -0.0117 -0.0009 0.0066 -0.0128 -0.0052 -0.0101 -0.0085 2008 -0.0033 -0.0074 -0.0026 -0.0061 0.0020 0.0000 -0.0215 -0.0045 0.0006 0.0075 -0.0139 -0.0022 -0.0090 -0.0033 2009 -0.0032 -0.0082 -0.0005 -0.0066 -0.0031 -0.0026 -0.0116 -0.0118 0.0007 0.0083 -0.0097 -0.0051 -0.0074 -0.0061 2010 -0.0073 -0.0050 -0.0038 -0.0069 -0.0046 -0.0036 -0.0168 -0.0067 0.0020 0.0066 -0.0068 -0.0046 -0.0109 -0.0056 2011 -0.0065 -0.0067 -0.0201 -0.0070

-0.0159 -0.0096 0.0013 0.0051 -0.0108 -0.0032 -0.0081 -0.0089

2012 -0.0062 -0.0070 -0.0160 -0.0068

-0.0140 -0.0109 -0.0037 0.0060 -0.0131 -0.0041 -0.0056 -0.0057 2013 -0.0029 -0.0054 -0.0120 -0.0048

-0.0144 -0.0099 -0.0065 0.0033 -0.0121 0.0017

Trend -0.0004 -0.0003 -0.0011 -0.0003 -0.0005 -0.0004 -0.0005 -0.0001 -0.0008 -0.0005 -0.0004 -0.0002 -0.0005 -0.0003 (t-stat.) (-6.26) (-5.52) (-2.74) (-6.37) (-5.5) (-4.27) (-6.27) (-2.74) (-8.78) (-6.8) (-5.93) (-2.37) (-5.86) (-4.05)

chi2=4.12 p=0.042 chi2=4.29 p=0.038 chi2=4.13 p=0.042 chi2=8.49 p=0.004 chi2=25.48 p=0.000 chi2=7.01 p=0.008 chi2= 6.81 p=0.009

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Table 5: Unidentified Propensity to Pay Tax by Fama French 12 Industries This table reports firms’ unidentified propensity to pay taxes (Propensity_Unidentified) by Fama French 12 industries, excludeing Utilities (8) and Financial industries (11). Trend measures the average annual change in Propensity_Unidentified. It is the coefficient of regressing Propensity_Unidentified on Year. Trend that are significant at less than the 10% level are reported in bold. Refer to Table 3 Panel A for definition of Propensity_Unidentifieds. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Year FFind_1 FFind_2 FFind_3 FFind_4 FFind_5 FFind_6 FFind_7 FFind_9 FFind_10 FFind_12 1991 0.0036 0.0028 0.0064 -0.0065 -0.0001 0.0004 0.0003 0.0043 -0.0001 -0.0045 1992 0.0037 0.0020 0.0057 -0.0016 0.0042 0.0020 0.0062 0.0045 -0.0019 -0.0045 1993 -0.0007 -0.0004 -0.0010 -0.0097 -0.0107 -0.0040 -0.0147 0.0045 -0.0064 -0.0076 1994 0.0012 -0.0009 0.0002 -0.0033 -0.0030 -0.0028 -0.0058 0.0040 -0.0078 -0.0049 1995 -0.0031 -0.0050 -0.0082 -0.0008 -0.0089 -0.0028 -0.0118 0.0043 -0.0051 -0.0073 1996 -0.0028 -0.0028 -0.0055 -0.0105 -0.0161 -0.0042 -0.0203 0.0005 -0.0085 -0.0076 1997 -0.0049 -0.0078 -0.0127 -0.0143 -0.0270 -0.0016 -0.0286 0.0006 -0.0065 -0.0053 1998 -0.0007 -0.0009 -0.0016 -0.0155 -0.0171 -0.0028 -0.0199 0.0014 -0.0082 -0.0058 1999 -0.0024 -0.0150 -0.0173 -0.0050 -0.0224 -0.0009 -0.0233 0.0029 -0.0083 -0.0064 2000 0.0001 -0.0173 -0.0172 -0.0245 -0.0417 0.0004 -0.0413 0.0014 -0.0094 -0.0079 2001 -0.0033 -0.0156 -0.0189 -0.0176 -0.0365 0.0004 -0.0360 0.0025 -0.0122 -0.0051 2002 0.0009 -0.0116 -0.0107 0.0028 -0.0079 -0.0050 -0.0128 -0.0005 -0.0103 -0.0098 2003 -0.0020 -0.0041 -0.0061 -0.0179 -0.0239 -0.0130 -0.0369 -0.0007 -0.0149 -0.0079 2004 -0.0079 -0.0050 -0.0128 -0.0020 -0.0148 -0.0114 -0.0262 -0.0012 -0.0165 -0.0088 2005 -0.0036 -0.0090 -0.0125 -0.0057 -0.0182 -0.0140 -0.0322 -0.0013 -0.0162 -0.0070 2006 -0.0034 -0.0052 -0.0086 0.0028 -0.0058 -0.0062 -0.0120 0.0007 -0.0093 -0.0113 2007 -0.0056 -0.0053 -0.0109 0.0025 -0.0084 -0.0106 -0.0190 -0.0009 -0.0086 -0.0127 2008 0.0015 0.0031 0.0047 -0.0129 -0.0083 -0.0110 -0.0193 -0.0015 -0.0125 -0.0045 2009 -0.0065 -0.0147 -0.0212 0.0093 -0.0119 -0.0098 -0.0217 -0.0013 -0.0008 -0.0095 2010 -0.0064 -0.0176 -0.0240 0.0174 -0.0066 -0.0111 -0.0177 0.0002 -0.0039 -0.0108 2011 -0.0100 -0.0234 -0.0334 -0.0144 -0.0477 -0.0099 -0.0576 -0.0014 -0.0082 -0.0109 2012 -0.0096 -0.0113 -0.0209 -0.0208 -0.0417 -0.0077 -0.0493 0.0033 -0.0158 -0.0114 2013 -0.0028 -0.0121 -0.0149 -0.0056 -0.0205 -0.0067 -0.0272 0.0046 -0.0121 -0.0088

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Trend -0.0004 -0.0007 -0.0011 0.0004 -0.0006 -0.0006 -0.0013 -0.0003 -0.0002 -0.0003 (t-stat.) (-4.16) (-3.16) (-4.06) (-0.61) (-1.92) (-4.7) (-3.36) (-2.77) (-2.24) (-4.3)