THE EFFECT OF TAX REFORM ON VALUE OF TAX STRATEGIES

Using a US panel data set from 1982 to 1992, I analyze how the 1986 Tax Reform Act (TRA1986) influenced the value of pursuing a sustainable tax strategy. I use the Compustat database to construct a panel data set for USA firms over the period 1982-1992. I only include firms with complete data for the entire study period. I then divide the sample into pre-reform (1982-1986) and post-reform (1988-1992) periods. I follow the accounting literature (e.g. Mayberry et al. 2015; Neuman et al. 2013; McGuire et al. 2014) that uses effective tax rates (ETRs) to measure tax avoidance. Lower ETRs imply that a firm engages in tax avoidance. Further, I identify a firm as having a sustainable tax strategy if the coefficient of variation of annual ETRs over a period of five years is low. Results indicate a negative association between tax avoidance behavior and the application of sustainable tax strategies, suggesting that firms that engage in higher tax avoidance behavior are not able to sustain their tax positions over time. The findings also imply that the TRA1986 diminishes the benefits of sustainable tax strategies in tax avoidance behavior.