President Trump, among other world leaders, have recently been cutting corporate taxes. In our new paper ”Cost behavior around corporate tax rate cuts” (with Jesper Haga & Henrik Höglund, all from Hanken School of Economics), we find that companies exhibit income-decreasing SG&A behavior before tax rate cuts which quickly reverses afterwards. Read the full paper here.
As an english-swedish pun, we affiliate dachshunds with "tax dogs" to illustrate tax cuts.
The more simple language summary is that we have examined how firms have responded to a number of recent national corporate tax rate cuts (e.g. a cut from 24.5% to 20.0% in Finland 2014). We have looked at financial statement data of 70,000 observations (firm-years) from 33 OECD member countries and found that firms in general use the window of opportunity that a tax change generates by engaging in a form of tax planning via selling, general, and administrative costs. We also find that certain characteristics are associated with this behavior. All in all, we inform people who use financial statements and other firm disclosure by providing an explanation for a specific form of cost behavior. Furthermore, we contribute to the discussion on corporate taxation by highlighting that firms seem to cut their tax payments in response to country-level cuts in corporate taxes, which are primarily made to make countries more attractive for business. This translates into large losses in tax revenues for the governments. Future research could examine what happens when the dachshunds run out of hair…
Disclaimer: No “tax dogs” (dachshunds) were harmed in the making of this paper.