The Incentives for Tax Planning

Recent research argues that differences in the structure of top executive compensation plans and/or corporate culture explain cross-sectional variation in tax avoidance. However, this research does not link tax planning to the incentives of the specific executive managing the tax function in the firm. We use a proprietary data set with detailed executive compensation to examine the relation between the incentives of the tax director and the book-tax gap, financial and cash effective tax rates, and measures of tax aggressiveness. We find that the incentives of the tax director exhibit a strong negative relation with the financial effective tax rate, but little relation with the other tax attributes. We interpret these results as indicating that tax directors are provided with incentives to generate a favorable impact to the financial statements.