. Book-tax gap
The next tax attribute we examine is the book-tax gap (BTG) because, assuming the BTG reflects tax planning, we can
use the BTG and its components to investigate both conforming and non-conforming tax planning. If, after controlling for
firm performance, the tax director’s compensation is associated with a smaller book-tax gap, then we can infer that the tax
director is compensated for managing taxable income in a manner that avoids the scrutiny of the tax authorities (Mills,
1998). On the other hand, as firms face taxes in multiple jurisdictions, we conjecture that the BTG may better capture ‘‘tax
planning’’ by measuring activity that reduces pre-tax income.21 If tax directors have incentives to reduce taxable income
even at the expense of reducing book income (i.e., conforming tax planning), then we should observe either a negative or
no association with the BTG and a negative association with both taxable income and pre-tax book income. On the other
hand, non-conforming tax planning may manifest in a positive association between the incentive compensation of the tax
director and the BTG.
We model the book-tax gap as a function of both economic variables that have been suggested by prior literature and
the incentives of the firm’s key executives. We specify the model as follows:
where BTG is the book-tax gap measured globally and scaled by total assets at the beginning of the period. The BTG is
measured as the difference between pre-tax income less income attributable to minority interest (Compustat PI ÀMII) and
taxable income (defined as current federal tax expense (TXFED) grossed up by the maximum federal statutory tax rate (i.e.,
35%) plus pre-tax foreign income (PIFO) less the annual change in NOLs (NOL)) scaled (by total assets).22 Incentives are the
. Book-tax gap The next tax attribute we examine is the book-tax gap (BTG) because, assuming the BTG reflects tax planning, we canuse the BTG and its components to investigate both conforming and non-conforming tax planning. If, after controlling forfirm performance, the tax director’s compensation is associated with a smaller book-tax gap, then we can infer that the taxdirector is compensated for managing taxable income in a manner that avoids the scrutiny of the tax authorities (Mills,1998). On the other hand, as firms face taxes in multiple jurisdictions, we conjecture that the BTG may better capture ‘‘taxplanning’’ by measuring activity that reduces pre-tax income.21 If tax directors have incentives to reduce taxable incomeeven at the expense of reducing book income (i.e., conforming tax planning), then we should observe either a negative orno association with the BTG and a negative association with both taxable income and pre-tax book income. On the otherhand, non-conforming tax planning may manifest in a positive association between the incentive compensation of the taxdirector and the BTG. We model the book-tax gap as a function of both economic variables that have been suggested by prior literature andthe incentives of the firm’s key executives. We specify the model as follows:where BTG is the book-tax gap measured globally and scaled by total assets at the beginning of the period. The BTG ismeasured as the difference between pre-tax income less income attributable to minority interest (Compustat PI ÀMII) andtaxable income (defined as current federal tax expense (TXFED) grossed up by the maximum federal statutory tax rate (i.e.,35%) plus pre-tax foreign income (PIFO) less the annual change in NOLs (NOL)) scaled (by total assets).22 Incentives are the
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