Measuring Corporate Tax Avoidance – An Analysis of Different Measures

Abstract

This study (1) gives an overview of and analyzes the different existing measures of tax avoidance in the empirical tax research literature and (2) aims at answering the question of how closely related they are in measuring corporate tax avoidance. Starting with a theoretical comparison of different Effective Tax Rate based measures, Book-Tax-Differences based measures, the measure developed by Henry and Sansing (2014), Tax Shelter Scores, and Unrecognized Tax Benefits an empirical comparison of the first three mentioned measures is conducted. The purely descriptive analysis reveals that although there are differences between the single measures and those differences persist over time, especially annual proxies exhibit considerable correlation, which increases with similarity in computation and inputs used. A comparison of annual with long-run measures implies that the reliability of annual measures in depicting long-run tax avoidance is not sufficiently high.

Keywords: tax avoidance, tax sheltering, Effective Tax Rate, Book-Tax-Difference