Journal of Accounting and Economics 31 (2001) 389–403

Empirical tax research in accounting:

A discussion$
Edward L. Maydew*
Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC 27599-3490, USA
Received 17 August 2000; received in revised form 21 February 2001

Abstract

This discussion reflects on the state and future of empirical tax research in accounting,
complementing and extending the work of Shackelford and Shevlin ( J. Acc. Econom.
31/32 (2001)). Specifically, this discussion (1) examines the scope of Shackelford and
Shevlin (J. Acc. Econom. 31/32 (2001)), (2) discusses what I view to be the main
contributions and limitations in the extant tax research, and (3) charts several directions
for future research. r 2001 Elsevier Science B.V. All rights reserved.

JEL classification: H25; K34; M40

Keywords: Taxes; Corporate taxes

1. Introduction

My charge as a discussant is to provide comments and critiques that can be

read as an integrated package with Shackelford and Shevlin (2001). At the
outset, let me emphasize that I agree with the majority of the opinions and
analyses in their review. However, to avoid redundancy this discussion focuses
on those areas in which I offer a different perspective.

$
I thank Merle Erickson, Austan Goolsbee, Doug Shackelford, Terry Shevlin, as well as Doug
Skinner and Ross Watts (the editors), and workshop participants at the 2000 Journal of
Accounting and Economics conference for their helpful comments.
*Corresponding author. Tel.: +1-919-843-9356; fax: +1-919-962-4727.
E-mail address: maydewe@bschool.unc.edu (E.L. Maydew).

0165-4101/01/$ - see front matter r 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 1 6 5 - 4 1 0 1 ( 0 1 ) 0 0 0 2 1 - 0
390 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403

This discussion is designed for three types of readers. First and foremost, it is
designed for Ph.D. students and new researchers interested in conducting tax
research. Second, it is for researchers who have an ancillary interest in taxation
as consumers of tax research. Finally, the discussion is for experienced tax
researchers who want to contemplate what the field has accomplished and
where it could be headed.
The discussion proceeds as follows. Section 2 begins by discussing the scope
of Shackelford and Shevlin (2001) and the costs of excluding most tax papers
published in finance and economics journals. Section 3 examines what we can
learn from tax research and introduces a metaphor for thinking about tax
research. Section 4 suggests a number of directions for future research and also
examines the methodological issues identified in Shackelford and Shevlin
(2001). Section 5 concludes this paper.

2. The scope of Shackelford and Shevlin (2001)

Shackelford and Shevlin define the scope of their review as research

conducted by accountants, specifically archival empirical tax research
conducted by accountants since the Scholes–Wolfson paradigm began.1
Review papers must set boundaries to be manageable and Shackelford and
Shevlin’s coverage is thorough and comprehensive given its stated scope.
However, a major theme in Shackelford and Shevlin (2001) is that tax research
is interdisciplinary, conducted by economists and finance researchers as well as
by accountants. Shackelford and Shevlin (2001) do mention some important
finance and economics papers. For the most part, however, their review
excludes research by non-accountants, which does not square with the
interdisciplinary nature of tax research that they espouse nor with both of
the authors’ appreciation for and ties to economics and finance.
I worry about unintended consequences of focussing too narrowly on
research by accountants. One cost is that it risks leaving readers with an
incomplete picture of the research on any given topic.2 During the most recent
three-year period, for example, 13 papers with the word ‘‘tax’’ in their titles
appeared in the Journal of Financial Economics or the Journal of Finance. Only
three of these 13 papers are cited in Shackelford and Shevlin (2001).3 Perhaps
1
See Scholes et al. (1990, 2001).
2
The same caveat applies as a result of the exclusion of theoretical and behavioral papers.
3
I examined issues from 1998–2000. The three cited papers are Graham et al. (1998), Reese
(1998), and Guenther and Willenborg (1999). The ten papers not cited are Bali and Hite (1998),
Barclay et al. (1998), Elton and Green (1998), Fama and French (1998), Frank and Jagannathan
(1998), Naranjo et al. (1998), Crowder and Wohar (1999), Graham and Smith (1999), Allen et al.
(2000), and Graham (2000).
 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403 391

these exclusions are harmless because the topics are different than those studied
by accountants. This is not so. Each of the non-cited papers from the finance
journals bear directly to topics discussed in the review. For example, non-cited
papers by Fama and French (1998) and Graham (2000) bear directly on the
capital structure research discussed in Section 3.2 of Shackelford and Shevlin
(2001).4 Bali and Hite (1998) and Frank and Jagannathan (1998) examine taxes
and asset pricing issues discussed in Sections 3.3 and 3.4. Most tax research by
economists is also excluded. The cost of excluding papers from economics
journals is probably less severe than excluding papers from finance journals, as
many of the tax papers in the economics journals deal with topics not generally
examined by accounting researchers, e.g., optimal taxation.
Another cost of focussing mainly on tax research by accountants is that
readers may get the impression that Shackelford and Shevlin exaggerate when
they argue that tax research is highly interdisciplinary. To provide empirical
evidence of the degree to which tax research is interdisciplinary, I performed a
search of all papers on SSRN using the keyword ‘‘tax.’’ The search produced
1680 papers, with the titles taking 20 pages to display. An examination the first
paper listed on each of the 20 pages, which is admittedly ad hoc but should not
be biased, revealed that accounting researchers were authors of only six of the
20 papers, supporting Shackelford and Shevlin’s assertion.
Further evidence of the degree to which tax research is interdisciplinary
comes from the rate at which tax research is published in the top general
journals in accounting, economics and finance. Over the most recent three-year
period, The Accounting Review, the Journal of Accounting and Economics and
the Journal of Accounting Research published a total of 19 papers with ‘‘tax’’ in
their titles, or a rate of 2.1 tax papers per journal-year.5 Recall that over the
same three-year period the Journal of Finance and the Journal of Financial
Economics published a total of 12 tax papers, or a rate of 2.0 tax papers per
journal-year. American Economic Review published 11 tax papers during the
same period, or 3.67 tax papers per journal-year. This evidence, while not
conclusive, is consistent with Shackelford and Shevlin’s claims that tax
research is highly interdisciplinary.
In summary, Shackelford and Shevlin (2001) is a comprehensive review of
archival empirical tax research conducted by accountants. Readers should be
cautioned, however, that it is not a comprehensive review of corporate tax
research, much less of tax research in general. Readers looking for tax research
on a given topic will in many cases need to supplement their reading of

4
In fact, at the time this article was written, Fama and French (1998) was by far the most heavily
downloaded ‘‘tax’’ paper on the Social Science Research Network (SSRN) and was ranked fourth
among all papers on SSRN in all-time downloads.
5
I gathered these data from the reference list of Shackelford and Shevlin (2001) and included
papers listed as forthcoming in 2000.
392 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403

Shackelford and Shevlin (2001) with a search of the finance and economics
journals, as well as a search of theoretical and behavioral papers within the
accounting journals.

3. The state of tax research

Shackelford and Shevlin (2001) do a good job of reviewing and summarizing

the papers and findings that accounting researchers have produced over the
past decade or so. However, I worry that readers, particularly doctoral
students, will get lost in the trees and miss the forest. Accordingly, this section
poses and addresses two questions about the tax literature as a whole. First,
what can we learn from tax research? Second, how can accounting researchers
best contribute to the tax literature?

3.1. What can we learn from tax research?

Despite its emergence as a line of inquiry in accounting, tax research has its
critics. Some researchers do not consider tax research to be part of accounting,
perhaps because of its interdisciplinary nature, but more likely because
generally it is not based on information economics, which provides the
theoretical foundation for most financial and managerial accounting research.6
The majority of accounting research is geared towards understanding
the role of accounting data as an information for decision making by
managers, investors, etc. in the face of uncertainty. However, uncertainty and
information asymmetries tend to enter tax research only as non-tax factors
(e.g., financial reporting costs) rather than as primary aspects of the tax issue in
question.
In my opinion, tax researchers would do well to reflect on these criticisms,
even if they believe them to be unfounded. Tax research competes in the
market for ideas and the perceptions of other academics affects the demand for
tax research. That said, I now attempt to explain how one can view most tax
research to best understand its role and contributions. I do so by using a
metaphor from a joke told to me by a (non-tax) colleague. As my colleague
chided me one day over lunch he asked: ‘‘Why did the chicken cross the road?’’
I replied that I did not know. He responded mirthfully, ‘‘Because taxes were
lower on the other side.’’ From me came fake chuckles but, alas, no snappy
retort.
6
Regardless of how one defines the word accounting, the rest of the world expects accounting
professors to have something intelligent to say on tax matters, and tax professionals remain a core
constituency as well as core product of most accounting programs.
 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403 393

The implication, of course, is that tax research is obviousFfirms respond

to cash flows, taxes affect cash flows, and therefore, firms respond to
tax incentives. Under the chicken-crossing-the-road scenario, tax research
is nothing more than a test of whether chickens (firms) are rational enough
to move to the low tax side of the road when doing so is in their best
interests.7
Over the years, however, I have found the chicken-crossing-the-road joke
does provide a useful metaphor for thinking about what tax research in
accounting is trying to achieve. Imagine now that instead of one chicken there
are many chickens, representing firms, some of whom have crossed the road
and some of whom have not. The real question is not why did the chicken cross
the road, but why did not all the chickens cross the road? If we assume, as
customary, that the chickens/firms are rational economic decision-makers, then
one way some chickens would choose to not cross to the low tax rate side of the
road is if there are costs associated with crossing the road. In the case of a real
chicken, one can imagine the costs. In the case of a firm, the costs could include
financial reporting effects, agency costs, capital constraints, direct transactions
costs, increased IRS scrutiny, and costs of tax planning. As Shackelford and
Shevlin (2001) point out, much existing tax research can be thought of as
attempting to understand the trade-offs among and economic significance of
tax and non-tax factors in business decisions. The question isFwhat do we
learn from this literature?
As a body of research, the trade-offs literature has three main contributions.
First, it adds to our understanding of the forces that shape the economic world.
Specifically, it helps us to know in which decisions taxes represent a first-order
effect and in which decisions taxes play an nth order effectFeven I would admit
that in some decision contexts, taxes play a minor, sometimes non-existent,
role.
Second, the tax trade-offs literature allows us to quantify non-tax costs in
dollars by measuring the tax savings firms must realize before they incur
particular non-tax costs. For example, studies quantify how much firms will
pay, in the form of forgone tax savings, for additional GAAP earnings.8
Finding experimental settings where one can quantify how much cash firms are
willing to pay for a particular level of GAAP earnings was difficult and rarely
done before the advent of the tax trade-off literature.
Finally, the trade-offs literature can be thought of as part of the public
economics literature that examines the extent to which taxes distort economic
behavior. The idea being that, in general, the more the taxes affect decision-
making the more they reduce economic efficiency. Empirical estimates of the

7
I later discovered that the joke was generalizable and had been used to poke fun at a variety of
non-tax lines of research.
8
For example, see Matsunaga et al. (1992) and Engel et al. (1999).
394 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403

extent to which various tax regimes affect behavior is therefore, central to

understanding whether and how much those tax regimes generate deadweight
costs.9
Outside of papers examining tax and non-tax trade-offs, the tax literature is
clearly not subject to the criticism that it is simplistic. The effects of taxes on
equilibrium asset prices and returns are particularly nettlesome from a
theoretical basis once one allows for tax clienteles and tax arbitrage. Empirical
evidence of the role that taxes play in asset pricing has been hard to come by
because of the lack of clean experiments and methods to control for risk
differences across firms. As I will discuss in the next section, the role of taxes in
asset pricing is one of the most active areas of current tax research and I expect
it will continue to be for some time to come.

3.2. How can accounting researchers best contribute to the tax literature?

This section is written primarily for new tax-accounting researchers deciding

where to best concentrate their research energies. As discussed earlier, tax
research is interdisciplinary in that it is produced by accountants, economists,
and finance researchers. Accountants tend to specialize in certain areas of tax
research in which they have a comparative advantage over economists and
finance researchers. The comparative advantage that accounting researchers
most often possess is a superior knowledge of institutional factors, in
particular, knowledge of the complexities of the tax law and financial
accounting. This institutional advantage is often accentuated with knowledge
gained from teaching tax strategy and financial accounting.
Consequently, accounting researchers produce much of the research
involving corporate taxation, while economists produce most of the research
involving individual taxation. Why? The institutional complexity of the tax law
is greater in corporate taxation than in individual taxation. Further, while
accountants are usually less well-versed in economics than are economists, the
gap is generally smaller in financial economics than in other branches of
economics, e.g., labor economics, macroeconomics. This also contributes to
accountants specializing in areas that draw from financial economics, namely
research involving corporations and financial markets.10
9
Some taxes have the potential to increase economic efficiency, namely when they encourage the
production of public goods, which generate positive externalities (e.g., basic scientific research), or
discourage the production of public bads, which generate negative externalities (e.g., pollution).
Most research on taxes and externalities has been by economists and the concept has not crept into
tax research in accounting.
10
Tax-accounting researchers occasionally publish their work in the top general finance journals,
a practice I hope becomes more common as tax research in accounting develops, e.g., Trezevant
(1992) and Guenther and Willenborg (1999).
 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403 395

Within corporate tax research, accountants contribute most heavily in those

areas that require the most institutional knowledge, including mergers and
acquisitions,11 international tax,12 and settings involving complex strategies,
entities, or securities (e.g., ESOPS, MIPS).13 Taxation involving regulated
entities is another area of institutional advantage.14 Accountants have an
overwhelming advantage in financial accounting. Therefore, accountants
produce nearly all the research that examines the trade-offs between tax
and financial accounting objectives.15 The same can be said for research
on tax-book conformity and accounting for income taxes.16 I am not
suggesting that accountants forsake economic theoryFtax researchers
can never learn too much finance and microeconomicsFonly that their
comparative advantage is institutional knowledge. Corporate tax research
in particular requires a combination of institutional knowledge, economic
theory, and research design that accounting researchers are well equipped to
provide.

4. Directions for future research: where are we going?

In this section, I chart several paths that future tax research might take,
including research on taxes in asset pricing and a number of corporate finance
issues. I also discuss opportunities to learn from the economics literature and
conclude with a discussion of some methodological issues. The paths are
neither mutually exclusive nor exhaustive of the interesting directions for tax
researchers and are clearly influenced by my personal tastes.

4.1. Future research on taxes and asset pricing: tax capitalization and implicit
taxes

More so than perhaps any tax area, research on the role of taxes in asset
pricing is spread across literatures in economics, finance, and accounting.
Unfortunately, the differences in terminology across these fields hamper the
integration of research findings. In particular, I would argue that implicit taxes
and tax capitalization are the same phenomena. In accounting, the term
11
Erickson (1998), Ayers et al. (2000), and Erickson and Wang (2000).
12
Collins and Shackelford (1992), Harris (1993), Klassen et al. (1993), Collins and Shackelford
(1997), Collins et al. (1998), and Newberry (1998).
13
Shackelford (1991), Engel et al. (1999) and Myers (2000).
14
Collins et al. (1995b), Petroni and Shackelford (1995), Mikhail (1999), and Ke et al. (2000).
15
Scholes et al. (1992), Guenther, (1994a, b), Dhaliwal et al. (1994), and Maydew (1997).
16
Guenther et al. (1997), Ayers (1998), Mills (1998), Miller and Skinner (1998), and Sansing
(1998).
396 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403

‘‘implicit taxes’’ was popularized by Scholes and Wolfson to describe the

phenomenon where tax favored assets bear lower pretax returns than tax
disfavored assets.17 ‘‘Tax capitalization’’ is the favored term among economists
and is gaining ground with accountants.18 Taxes are said to be capitalized into
prices when the current prices are lower than they otherwise would be given
future taxes on those assets.
Consider a taxable bond and a tax-exempt bond that have the same pretax
interest payments. If investors are willing to pay less for the taxable bond than
for the tax-exempt bond, then tax capitalization is said to have occurred in the
taxable bond. When the price of the taxable bond is driven down, its pretax
return rises. In this case, the tax-exempt bond is said to bear implicit taxes to
the extent it bears a lower pretax return than the taxable bond. Thus, we see
that tax capitalization and implicit taxes are two sides of the same coin. Tax
capitalization tends to be defined in terms of the prices of tax disfavored assets,
while implicit taxes tend to be defined in terms of pretax returns of tax favored
assets. But the terms are equivalent.
I would also argue that tax capitalization and implicit taxes are far more
fundamental and pervasive concepts than they are commonly thought to be.
Consider the classic question of whether there is a tax benefit to corporate
leverage, a question not normally associated with tax capitalization.
Modigliani and Miller (1963) examine leverage when there is corporate level
taxation in which interest, but not dividends, are deductible to the firm.
Modigliani and Miller (1963) assume no investor level taxes and find massive
tax gains to leverage. By assuming no investor level taxes, however, there is no
opportunity for differing investor level taxation to affect the pretax return on
debt versus equity. Thus, if investor level taxes do not affect pretax returns on
debt and equity, then a large tax gain from leverage will exist.
Miller (1977) allows for personal level taxes and greater investor level
taxation of interest than returns on equity. In Miller’s setting, the greater
investor tax burden on interest causes investors to demand an increased pretax
return on debt relative to equity (equivalent to bidding up the price of equity
relative to debt) such that the corporation enjoys no tax gain to leverage. The
tax disadvantage to leverage at the investor level offsets the corporate level tax
advantage to interest deductibility. The classic question of whether there are
tax gains to leverage boils down to whether investor level taxation affects the
equilibrium prices and pretax returns of debt relative to equity. The tax gains
to leverage question is essentially just one example of the larger question of the
extent to which tax capitalization/implicit taxes occur.

17
Scholes and Wolfson (1992), Guenther, (1994a, b), Erickson and Maydew (1998), and Scholes
et al. (2001).
18
Collins and Kemsley (2000) and Lang and Shackelford (2000).
 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403 397

Existing studies of tax capitalization/implicit taxes for the most part

simply document the assets and settings in which tax capitalization
appears to be taking place. While such studies are useful, tax capitalization
research could benefit from a stronger link to the economic theory
of tax incidence. Without a foundation of underlying theory, tax
capitalization research has been unable to address key questions. Under what
conditions do we expect tax capitalization to take place? What factors
determine the extent of tax capitalization? The public economics literature
demonstrates that the economic incidence of a particular tax depends
on the effect that tax has on equilibrium prices and quantities, with the extent
of the effect determined by the elasticity of supply and demand. Tax
capitalization viewed more broadly is a manifestation of the economic
incidence of the tax.19

4.2. Future research on taxes and corporate finance

Taxes potentially affect a number of corporate decisions that fall under the
purview of corporate finance. For example, Brealey and Myers (2000) has
chapters devoted to debt policy, dividend policy, pensions, options, leasing,
hedging, mergers and acquisitions, and financial intermediation (e.g., banking,
insurance, mutual funds), all of which are affected by taxes. Accounting
researchers can use their institutional knowledge to contribute to these
literatures, for example, by identifying unusual quasi-experimental settings or
events that can be used to test theories.20
Accounting researchers have made initial inroads into tax effects on
domestic mergers and acquisitions, but the role of taxes in cross-
border mergers and acquisitions is largely unknown and deserving of more
attention.21 Promising new research examines the role taxes play in decisions of
pension funds and mutual funds, and even not-for-profit organizations.22
Further research is also needed to explain why some firms appear to be more
aggressive tax planners than other firms, whether the existence of international
operations affects tax planning ability, and the prevalence of corporate tax
shelters.23
19
See Shackelford (1991) for an example of a paper that uses the concepts of tax shifting and tax
incidence.
20
For example, Lang et al. (2001) use Germany’s repeal of capital gains taxes on the sales of
cross-holdings to provide evidence relevant to, among other things, the ‘‘diversification discount’’
controversy in finance.
21
Collins et al. (1995a).
22
See Kraft and Weiss (2000), Myers (2000), and Yetman (2000).
23
Phillips (1999) and Olhoft (1999).
398 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403

In the areas of capital structure and dividend policy, the opportunity exists
to clarify whether taxes do indeed have large effects on the pricing of debt and
equity securities. In particular, considerable controversy has surrounded
several studies that claim to find large valuation effects from the taxation
of dividends (Harris and Kemsley, 1999; Harris et al., 2001; Collins and
Kemsley, 2000). Shackelford and Shevlin (2001) detail several concerns with
this literature and in places refer to its findings as ‘‘controversial’’ and
‘‘implausible.’’
Some, but certainly not all, of these concerns are probably due to the lack of
caveats in the first paper, Harris and Kemsley (1999). For example, Harris and
Kemsley (1999) sum up their findings as ‘‘robust evidence that dividend taxes
have a substantial, predicable influence on the relative valuation weights
investors assign to equity versus earningsy’’ (p. 289). In contrast, Collins and
Kemsley (2000), cautions that ‘‘ywe do not consider our evidence conclusive’’
and ‘‘firm evidence should be deferred until more evidence is collected’’ (p.
425–426). In two recent examinations of dividend capitalization, Dhaliwal et al.
(2001) and Hanlon et al. (2001) question the robustness of Harris and Kemsley
(1999) and provide a variety of reasons to question the model of dividend
capitalization employed in that study and related studies. I discuss two key
concerns with these models of dividend tax capitalization.
First, these studies are built on the shaky assumption that all earnings are
eventually distributed to shareholders as taxable dividends. It is common
knowledge that the taxation of all firm earnings as dividends at the shareholder
level is not inevitable as the studies assume. For example, dividend taxation can
be avoided through share repurchases and liquidating dividends, both of which
are normally taxed at more favorable capital gains rates. Certain acquisition
structures also result in the distribution of earnings without triggering dividend
taxation. The question is, if dividend taxes did have large negative effects on
firm value as the above studies claim, would not firms avoid decreasing their
value by engaging in more share repurchases than they do?
Second, how could large valuation effects from dividend taxation exist in the
presence of tax clienteles and tax arbitrage by non-taxable investors? Even if all
earnings were distributed in the form of taxable dividends, the taxes on those
dividends can be avoided by having a non-taxable investor hold the stock at
the time of the dividend, a clientele effect. Further, non-taxable investors could
profit from tax arbitrage involving ‘‘dividend capture’’ in which they go long in
stocks around the time they make their dividend distributions and short in
stocks not making distributions. I am not suggesting that tax arbitrage will
necessarily eliminate all of the effects of dividend taxation, as Shleifer and
Vishny (1997) show that arbitrage can be risky in practice. Coupled with the
concerns detailed in Shackelford and Shevlin (2001), the concerns above
indicate a need for additional research to determine the extent to which
dividend taxes are capitalized into firm value.
 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403 399

4.3. Drawing from economics

As tax research in accounting matures as an area, it is natural that

increasingly sophisticated economic theory will be brought to bear on the
analysis. While tax research in accounting is largely microeconomics-based,
there is room for improvement in the level of economic analysis actually used.
In the future, I expect enterprising researchers to draw more heavily from the
economics literature both in terms of theory and approach.
For example, when economists think about the effects of taxes on decision-
making, they often think in terms of the economic distortions created by the
tax rules in question. In particular, when taxes affect prices, they can lead to
substitution effects that generate deadweight costs (which can be loosely
defined as the loss in economic efficiency in excess of the tax revenues collected;
also called the ‘‘excess burden of taxation’’). Such concepts have barely
penetrated tax research in accounting.24 Shackelford and Shevlin (2001)
conjecture that tax accountants tend to ignore the long history of tax research
in finance and economics because they are preoccupied with the Scholes–
Wolfson paradigm shift. If that is true, then it sadly runs counter to the intent
of Scholes and Wolfson, which was to inject economics and finance into tax
research in accounting.

4.4. Methodological issues

Shackelford and Shevlin (2001) raise a number of methodological issues on

which I would like to comment. First, I agree that the Plesko (1999) criticisms
of financial accounting-based marginal tax rates are premature based on the
evidence in that paper.25 Shevlin (1999) describes several concerns with
Plesko’s (1999) marginal tax rate analysis. I would add that Plesko’s (1999)
definitions of effective tax rates also are not meaningful. Plesko (1999) defines
effective tax rates with the numerators as measures of taxes paid and the
denominators as measures of taxable income. The problem is the unusual
approach of using taxable income as the denominator in the effective tax rate.
Such ratios by definition will approximate the statutory tax rate, with
departures apparently reflecting the existence of tax credits. I do agree with
Plesko (1999) that more work is needed to examine the accuracy of marginal
and effective tax rate estimates that use financial statement data.
Second, Shackelford and Shevlin (2001) raise the issue of self-selection in tax
research, which has not received much attention in the tax literature. Self-
selection is pervasive in that the issue can arise whenever the researcher lacks
the ability to randomly assign observationsFquasi-experimentation in the
24
Anand and Sansing (2000) and Goolsbee and Maydew (2000).
25
Shevlin (1990, 1999) and Graham (1996).
400 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403

sense of Cook and Campbell (1979)Fwhich is the norm in social science

research. Enterprising researchers may find it useful to re-examine the prior tax
literature to determine when the results differ once self-selection is controlled
for using well-accepted econometric techniques.26 Of course, I must admit that
self-selection is not peculiar to tax research, nor has anyone made a case that
self-selection is more problematic in tax research than in other areas of
accounting or finance research.
Finally, I am not convinced (though I could be) with the assertion that
interaction effects are necessary to infer tax and non-tax trade-offs in
regressions of a decision on variables that proxy for tax and non-tax costs
(Shackelford and Shevlin, 2001). Consider the choice between using the FIFO
or LIFO inventory methods. Due to the well-known conformity requirement,
in the LIFO/FIFO choice, firms must choose between reducing their current
tax liability and reporting high income to their shareholders. The trade-off is
imposed by nature (in this case the LIFO conformity rule) and exists
independent of any regression model. Regressing the inventory method choice
on proxies for the tax and financial reporting costs simply documents which
factors are significant in a manager’s decision-making. Whether or not the
factors are also trade-offs depends on whether nature requires sacrificing one in
order to have the other. While interaction effects are useful for determining if
the level of one variable affects the importance of another, I do not believe that
the existence of interaction effects is a necessary condition for uncovering
trade-offs. Hopefully this question will be resolved in the literature.

5. Conclusions

Shackelford and Shevlin (2001) do a good job of reviewing archival-

empirical tax research in accounting. My discussion is designed to complement
their work by offering several different perspectives. Several key recurring
themes emerge. First, because microeconomic tax research is interdisciplinary,
a thorough appreciation involves examining papers from finance and
economics as well as accounting. Second, most tax research in accounting
combines microeconomics and finance with accountants’ comparative advan-
tage in institutional tax and accounting factors. Third, while existing tax
research is grounded in microeconomics, opportunities remain for future
researchers to draw from the finance and economics literatures on a level
deeper than exists in the extant research. Finally, while predicting the future
can be hazardous, I offer several avenues for future research, such as the role of
tax arbitrage in asset pricing and work on certain methodological issues.
26
See Heckman (1976, 1979) and Maddala (1991). For examples tax research that dealt with
issues of self-selection, see Graham et al. (1998), Guenther et al. (1997) and Maydew et al. (1999).
 E.L. Maydew / Journal of Accounting and Economics 31 (2001) 389–403 401

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