Investment-related factors and a company’s operating profile explain more of the measurable differences in US corporate tax rates than many popular theories about executive pay and board structure, according to a study published in Management Science. However, the researchers found that much of the variation in tax rates remains unexplained.
The distinction matters. A company with a low effective tax rate may be using tax credits and deductions created by lawmakers, carrying forward previous losses or operating in businesses with different tax treatments. It may also be engaged in extensive tax planning. A low rate on its own does not tell us which explanation applies.
A separate analysis by the Institute on Taxation and Economic Policy found that at least 88 large US corporations reported no federal corporate income tax for 2025, despite earning a combined $105 billion in domestic pretax income. ITEP based its figures on company financial reports rather than confidential tax returns.
Researchers compared 31 tax explanations
The study, by Andrew Belnap of the University of Texas at Austin, Kaitlyn Kroeger of the University of Iowa and Jacob Thornock of Brigham Young University, brought together 31 variables used in previous corporate tax research.
The principal analysis covered 8,520 firm-year observations from 1987 to 2021. A firm-year represents one company during one year, so this was not a study of 8,520 different businesses. The sample consisted of US-incorporated public companies with positive pretax income and at least $10 million in assets. Financial companies and utilities were excluded from that part of the analysis because they face different regulatory and reporting requirements.
The researchers used Shapley value variance decomposition, a statistical method for estimating how much each variable contributes to the explanatory power of a model. It can show which factors account for more of the measured variation, but it does not establish that any one factor caused a company’s tax rate.
Effective and statutory tax rates are different
The US federal corporate income tax rate has been 21% for tax years beginning after 2017, according to the Internal Revenue Service. That rate applies to taxable income, which is not necessarily the same as the pretax profit shown in a company’s financial accounts.
Deductions, tax credits, previous losses, depreciation rules and the timing of payments can all affect a company’s final bill.
The researchers examined two common measures. The cash effective tax rate compares cash taxes paid with pretax income. The GAAP effective tax rate compares the tax expense reported in financial statements with pretax income.
Neither measure, by itself, determines whether a company has broken the law. Tax avoidance generally refers to legal steps taken to reduce tax liabilities. Tax evasion involves illegally concealing income or providing false information.
Investment factors ranked highly
Variables connected with investment opportunities accounted for roughly one-third of the explained variation in companies’ cash effective tax rates, making this the largest of the theory groups examined for that measure.
The group included research and development spending, intangible assets, capital intensity, foreign income, multinational status and the use of subsidiaries in tax havens. These characteristics can interact with tax credits, deductions and international tax rules. They can also provide companies with more opportunities for tax planning.
However, the one-third figure does not mean investment factors explained one-third of all differences in cash tax rates. It refers only to their share of the variation that the model managed to explain. The authors reported that the 31 variables collectively had low total explanatory power.
Operating characteristics also ranked highly, particularly for the tax expense reported under GAAP. Profitability, previous losses and the balance between debt and equity can affect taxable income without requiring an elaborate tax strategy.
Financial pressure may affect cash tax planning
Financial constraints accounted for about one-fifth of the explained variation in cash effective tax rates in the published research summary. Companies short of money have a stronger reason to preserve cash, which may make tax planning more attractive.
The same group was much less informative for the GAAP effective tax rate in the researchers’ public working paper. This difference may indicate that financially constrained businesses focus more on reducing cash payments than on lowering the tax expense shown in their accounts.
Belnap said: “There’s all this noise about companies that don’t pay taxes or have very low tax rates, but if you dig in, a lot are driven by pretty benign factors.”
That does not mean aggressive tax avoidance is rare or harmless. It means the statistical study was designed to compare explanations for tax-rate variation, not to audit particular companies or judge whether their tax arrangements were acceptable.
Managers and business units also mattered
In a separate part of the analysis, persistent differences associated with companies, managers and business units explained more than the 31 changing company variables.
Manager fixed effects accounted for 24% of the explained variation in the cash tax-rate model described by the researchers. This is sometimes called a manager’s “tax fingerprint”. It suggests that tax outcomes differ systematically under particular executives, even after they move between companies.
Even so, it does not reveal what those managers did or prove that they pursued aggressive tax strategies. A fixed effect captures a recurring statistical pattern. Experience, risk tolerance, business selection and unmeasured company characteristics may all contribute.
Differences also appeared inside the same corporation. According to the McCombs School of Business summary, Ford’s vehicle manufacturing operation had an effective tax rate of 25%, compared with 19% for its financial services division. Different activities can therefore produce different tax outcomes under one parent company.
What does this mean for tax policy?
Variables connected with company size, board composition, ownership and executive pay explained comparatively little of the measured differences. The results indicate that corporate governance reforms alone may have a limited effect on effective tax rates.
Rules governing research credits, intangible assets and income earned in different jurisdictions may have a more direct impact. Better disclosure by country and business unit could also help investors and tax authorities see where profits arise and how they are taxed.
“Companies are responding to the incentives that politicians are providing,” Belnap said. “Policymakers who think there is too much tax avoidance need to understand the big drivers, then adjust the incentives being given.”
The study does not settle the wider argument about whether companies pay a fair amount of tax. Its sample excludes private companies, loss-making businesses, financial firms and utilities from the principal analysis, and US tax law changed several times during the period examined. The results explain statistical patterns in effective tax rates, not the legality or fairness of an individual company’s tax bill.
