Cost behavior around corporate tax rate cuts

Abstract

In this study, we investigate cost behavior of companies in Organisation for Economic Co-operation and Development (OECD) member countries before corporate tax rate cuts become effective. We consider such events to generate strong incentives for intertemporal cost shifting. We analyze the time period between 2011 and 2016, which includes 32 tax reductions. The results show that companies exhibit income-decreasing selling, general, and administrative cost behavior before tax rate cuts, and that the extent is proportional to the magnitude of the decrease in the tax rate. Furthermore, we find stronger evidence of this form of tax-induced earnings management in lower tax compliance and code law countries, as well as for private companies.