A few years ago, I bought some stock in Delta Airlines just because I thought the coffee they served on a flight was particularly delightful. I did not realize until sitting down to write this post that Delta reported an effective tax rate of 23.6% in its most recent annual report. This is a sort of shameful admission for a tax accounting researcher.
When I was asked about contributing to the Write-Off blog, it got me thinking about what makes tax accounting researchers distinct from economists and legal scholars doing tax research. We are certainly interested in many of the same issues of tax policy. Beyond issues of tax policy though, tax accountants also have an interest in how tax information is reported to and valued by investors. Most of this research examines the association between various tax related measures (for example, firms’ effective tax rates) and stock market data. All this research relies on market data where sophisticated institutional investors play a big role in setting prices. As a consequence, it is difficult to learn much from these papers about how less sophisticated individual investors think about or value corporate taxes.
Despite knowing better, I frequently trade individual stocks (my track record is less than impressive). Given my interest in corporate taxes, you would think I would spend a lot of time carefully studying firms’ tax footnotes before trading. The truth is that I hardly ever (read never) look at a tax footnote before buying or selling stock. However, in doing background work for a research project, my co-author Brian Williams from Indiana University, uncovered some interesting comments about corporate taxes on some online investor message boards. Here is an example:
User: Corporal Carrot: Posted on Motley Fool Message Board on 10/28/2004 referencing the firm eBay (ebay)
“A serious disconnect between apparent profitability and tax profitability that persisted for a period of years is worth questioning… a low effective tax rate is not in itself a reason to buy a company since these things tend to come back to the norm in the end.”
This is just one example of a number of quotes from individual investors about the implication of changes in effective tax rates or low effective tax rates. The comments raise all types of interesting questions about how individual investors think about corporate taxes. Do they assume any deviation from statutory tax rates is transitory in nature? Do their feelings about a firm’s social obligation to pay taxes influence their decisions to buy or sell stock? Do they view low effective tax rates as risky? Do individual investors associate aggressive tax strategies with aggressive financial reporting? Reading the message board quotes raised a lot of questions for which I don’t have good answers. That said, I probably won’t stop trading based on my coffee preferences!