4.3 Specific measures of ‘‘tax aggressiveness’’
The final tax attribute that we examine is tax aggressiveness. As discussed above, there is no generally accepted
definition of this construct, and it is thus difficult to measure. Nevertheless, we investigate two recently developed
measures of tax aggressiveness: Frank et al.’s (2009) DTAX and Wilson’s (2009) SHELTER. Frank et al. (2009 p. 468) define
‘‘aggressive tax reporting’’ as ‘‘a downward manipulation of taxable income through tax planning that may or may not be
considered fraudulent tax evasion.’’ Anecdotal evidence suggests that for public companies, the ideal tax planning
transactions are those that create permanent differences.24 By creating permanent differences, the firm reduces cash taxes
paid without decreasing financial statement income.
To investigate whether incentives are associated with permanent differences and ETR differentials (hereafter ‘‘perm
diffs’’ for expositional simplicity), we begin by computing a modified version of Frank et al.’s (2009) DTAX measure of
discretionary perm diffs. Frank et al. (2009) compute DTAX as the residuals from a regression of an estimate of perm diffs
on measures of intangible assets, income of unconsolidated subsidiaries, minority interest, state tax burdens, changes in
NOLs, and lagged perm diffs. We modify this computation by including Oler et al.’s (2007) measure of foreign assets
(Foreign Assets) to control for the existence of multinational operations. By including Foreign Assets in the first stage, we
attempt to control for ETR differentials that result from ‘‘ordinary’’ overseas operations. Without this modification, DTAX
would suggest that firms with extensive foreign operations or foreign operations in low tax jurisdictions are always more
aggressive tax planners.25 Table 2 reports that the mean (median) DTAX is 7.5% (0.30%) of total assets. Positive levels of