The Role of Managers in Corporate Tax Avoidance

A recent article by Dan Amiram, Andrew M. Bauer, and Mary Margaret Frank examines the issue of corporate tax avoidance as a product of incentives.  The authors suggest that “corporate tax avoidance by managers is driven by the alignment of their interest with shareholders.”*  The tax role of the manager is made clear by studying the “effects of corporate tax avoidance on shareholders’ after-tax cash flows” in both classical tax systems and imputation tax systems.  The authors conclude that there is higher corporate tax avoidance in classical tax systems if managerial and shareholder interests are closely aligned.

Classical systems tax corporate earnings at both the firm and shareholder level.  This leads to double taxation since the same earnings are taxed at the corporate level and the individual shareholder level when they are distributed as dividends.  There exists incentive for tax avoidance in a classical system because it paying fewer taxes “increases after-tax cash flows creating either more private benefits for managers or higher after-tax cash flows to shareholders.”  The U.S. employs a classical tax system.

Imputation systems, in contrast, tax corporate earnings at the firm level, which are then credited against shareholders’ taxes on dividends.  This is a single tax because the “credit causes the total tax paid on earnings to be equal to the shareholders’ tax.”  Avoiding corporate tax in an imputation system will increase the after-tax cash flows to managers, but “does not increase the after-tax flows to shareholders.”  In fact, the after-tax flows to shareholders might actually decrease because of the high cost of corporate tax avoidance.  From the shareholder’s point of view, there is less incentive to avoid corporate tax in an imputation system.

Interestingly, many countries have switched from imputation to classical tax systems.  This article uses 14 years of data from 28 countries to show that “in the years after a country eliminates its imputation system, firms from these countries increase their corporate tax avoidance activities.”  Both managers and shareholders are now incentivized to increase their after-tax cash flow.  If, however, “the shareholders’ benefits from lower corporate taxes are eliminated, corporate tax avoidance falls.”

The authors’ findings should be taken into consideration when regulating corporate tax avoidance in the future.  A government that wants to lessen avoidance might wish to consider the incentive relationship between managers and shareholders.  For example, the EU’s tax harmonization had the unintended consequence of increasing corporate tax avoidance in Europe.  The elimination of imputations systems by many European countries after the ECJ ruled them discriminatory, “may have unknowingly increased corporate tax avoidance in Europe.”

Click here to read the complete article.

*All quotations cite Amiram, Dan, Bauer, Andrew M. and Frank, Mary Margaret, Manager-Shareholder Alignment, Shareholder Dividend Tax Policy, and Corporate Tax Avoidance (April 23, 2013). Darden Business School Working Paper No. 2111467. Available at SSRN: or