June 26, 2006
Junior Scholars Workshop: Susan Morse, The How and Why of the New Public Corporate Tax Compliance Norm
Posted by Christine Hurt

Good morning, and welcome to the third paper in the Second Annual Conglomerate Junior Scholars Workshop.  Today's presenter is Susan Morse, a Teaching Fellow at Santa Clara University School of Law.  This morning, we will have expert commentary on Susan's paper, The How and Why of the New Public Corporate Tax Compliance Norm in the form of separate posts after this one.  This post will float at the top, and readers are invited and encouraged to read some combination of the paper, the abstract and the commentary and respond in the comment section of this post; Comments will not be open on the individual commentators' posts in an effort to contain all comments in one convenient section of the blog.  I look forward to the discussion!

The Glom views this workshop as a virtual version of an academic conference.  Therefore, any anonymous comments will be deleted.  As with a conference environment, if you have comments you would prefer to mention to the presenter in person, feel free to email Susan privately.  The abstract for the paper follows:

This paper examines the recent shift toward a stronger federal income tax compliance norm at public corporations, as evidenced by practitioner and government comments and survey results. The apparent demise of mass-marketed corporate tax shelters presents the clearest example of this new norm. The paper focuses on the organizational behavior of tax decisionmakers within public corporations as they respond to Sarbanes-Oxley, enforcement initiatives, and tax shelter regulation. The paper identifies three elements that have contributed to the development of a stronger tax compliance norm. First, Sarbanes-Oxley has resulted in the expansion and increased transparency of public corporation tax decisionmaking groups. Organizational behavior insights suggest that this should produce more considered decisions. Second, civil and criminal enforcement has resulted in real concerns about personal and firm liability among organization leaders. This causes organization hierarchies to encourage and reward compliance. Third, the government has clearly identified objectionable tax shelter transactions and plainly labeled them unacceptable and even fraudulent. In the tax shelter area, this substantially reduces the ethical or legal uncertainty that otherwise presents an obstacle to the development of compliance norms in organizations. The paper identifies elements of this story that do not fit neatly under the classic economic analysis of tax avoidance or evasion, including the importance of enforcement outside the tax context and the particular power of clear government rules. The conclusion also discusses what the government might do, in light of the organizational behavior influences identified by the paper, to preserve and expand the new public corporation tax compliance norm.

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Comments (8)

1. Posted by Lisa Fairfax on June 26, 2006 @ 11:01 | Permalink

I thought the paper very interesting, in part because, as others suggest, it is refreshing to see some discussion of the possible positive ramifications of SOX.

However, I share Claire's concern that there is too little attention paid to the possibility that the "norm" Susan points out is just a temporary response--albeit partially to SOX, but also to corporate scandals and "perp" walks. If this is true, then critics will argue that we can expect that response to fade eventually. So I think it would be interesting to get a discussion about whether the norm is temporary and what impact it has on her ultimate analysis.

In responding to critics on this issue, I think Susan can take her cue from the literature on norms. Indeed, some scholars suggest that once a group has made a commitment to a particular behavior, the desire to remain consistent with that commitment will force compliance with the behavior--even when there may be disagreement regarding the legitamacy of that behavior. This tendency towards consistency means that if a normative shift occurs, there is a potential that it will have a more lasting impact on group behavior. Thus, I think there can be a more nuanced discussion about how a particular behavior can outlast the condition to which it was responding.

2. Posted by Vic Fleischer on June 26, 2006 @ 11:13 | Permalink

Susan -- This is a great paper, and one of the most refreshing and novel pieces on tax shelters that I've read in quite some time. I think your discussion of the impact of SOX on the institutional decision-making process is the most important contribution of the paper, as well as, for me, the most convincing part. I'm less convinced by the sections on criminal prosecutions and on the shelter-listing strategies; as Claire suggests, you could just as easily use this evidence to prove the frustrating absence of a compliance norm. You might even consider reframing these sections as the context in which tax directors (and other managers) make decisions rather than as direct evidence of a compliance norm. For me, the lesson of your paper is that if we want to curb tax shelter activity, we should pay attention to the institutional pressure points on decision-making and not just concern ourselves with the design of penalties (compare Raskolnikov, 2006) or the substantive rules (compare Zelenak & Chirelstein, 2005).

I think you've really advanced the literature here by forcing us to think in a more sophisticated way about the penalty-deterrence question.

3. Posted by Susan Morse on June 26, 2006 @ 14:05 | Permalink

Thanks so much to all of the commenters for your thoughts on my paper.

Several threads come through the comments. Let me see if I've got two of them straight.

1) Come on (you say) we're not sure we agree that corporations have adopted a general tax compliance religion, and anyway we don't believe it's here to stay. You're right: the best direct proof of a compliance norm relates narrowly to corporate tax shelters and reduces to the fact that everyone you ask says definitively that promoted shelters are dead. The paper attempts to explain how this narrow compliance change came about. It does not mean to argue that a broad norm of compliance has been adopted that goes far beyond that. (I think one empirical paper by Cook, Huston & Omer comes to mixed but generally negative results with respect to the general question of whether Sarbanes-Oxley has reduced effective tax rate management.)

I would, however, like to suggest that things might develop toward a broader norm (whether a reactive legal norm or an internalized social norm). In order to do this I've got to deal with greyer areas in a persuasive way. (I agree that tax shelters themselves are somewhat greyer than I suggest at times although perhaps they will remain a fairly clear de facto case if the government has litigation success on its listed transactions.)

What if I more clearly acknowledged that I don't think a broad social norm has yet developed but then said, even for grey areas, a window of regulatory opportunity exists. It's tougher to make a rule stick because you don't have clarity on your side (a particular liability in the corporate organizational context). But perhaps the organizational behavior angle offers another insight: could the government act as a direct participant in tax decisionmaking at public corporations, entering this discussion at a time when corporations have a compliance focus to at least some extent? Could the discussion in the last part of the paper of the IRS effort to get itself invited to the decisionmaking table through the early-issue-resolution programs like the CAP program be made persuasive as an example of OB-aware creative regulation that might break out of the historical cyclical compliance pattern? This approach might fit into the rules-vs-standards literature as well as the organizational behavior framework of the paper.

2) There is a causality proof problem. I.e., even if there is improved compliance, how can I show that expanded & more transparent decisionmaking groups, enforcement and clear tax shelter rules are together responsible (and other factors are not as responsible) for whatever compliance uptick has been observed. Is it sufficient to say "everyone (government, company people, tax advisors) says these things are important and doesn't mention other factors?" I would be thrilled to hear any other evidence source ideas.

4. Posted by Michael Guttentag on June 26, 2006 @ 19:45 | Permalink

An excellent summation. I think you are right on track. One more suggestion, if you don’t mind. To the extent that you end up arguing that we should tap into norms as a way to improve the effectiveness of tax rules, the work of Dan Kahan (you can see some of his work discussed here http://www.elsblog.org/the_empirical_legal_studi/2006/06/cultural_cognit_1.html ) may be a more helpful reference point than the rules vs. standards literature. Good luck!

5. Posted by Susanormn Morse on June 27, 2006 @ 4:47 | Permalink

Mind another suggestion?! Quite the contrary; I have found the norms literature challenging to navigate and that is very helpful.

One more thought on causality: would it be useful to try to show, in an effort to demonstrate that Sarbanes-Oxley has been important in developing a compliance uptick, to contrast the apparent increase in compliance among public corporations with the situation for non-public corporations or even individuals? Anti-tax shelter rules and enforcement initiatives hit them, too, but there are at least a couple of continuing examples of tax products (e.g. products wrapp ed around life insurance or involving the use of offshore trusts) targeted at individuals. There is also the evidence of the $350B or so annual tax gap which is overwhelmingly due to misreporting by small businesses.

6. Posted by Jake on June 27, 2006 @ 19:51 | Permalink

Ms. Morse writes: "I would be thrilled to hear any other evidence source ideas."

That's easy. Go interview corporate tax officers and get them to describe the time, effort, and money they are putting into SOX compliance and paying heed to the wave of reported tax shelter decisions by the courts.

I know several corporate tax officers (and am married to one), and attend tax conferences where they beat up on IRS and SEC panelists over the new regulatory regime. These people are outspoken and have an agenda. Properly and anonymously conducted, interviews would yield the right kind of evidence.

I'm not talking about bare bones anecdotal evidence. ("Nobody here ever used to have to come in and work in weekends, but post-SOX we do.") Get down in the weeds, talk to the interviewees about specific time-and-motion evidence like the industrial engineers starting doing 100 years ago.

7. Posted by Susan Morse on June 28, 2006 @ 4:23 | Permalink

Thanks, that is useful. The paper now cites several tax director surveys but doesn't present the kind of detail that interviews would yield. One of the sources that I found most persuasive on the general topic of how organizational ethics develop was the Jackall book Moral Mazes, which is based almost entirely on interview evidence. (Although I believe it took him years to collect it!)

8. Posted by Susan Morse on June 29, 2006 @ 9:11 | Permalink

Thanks very much to everyone at Conglomerate for hosting this workshop and giving me the terrific opportunity to present at it. Thanks in particular to my commenters. I've come away with some great critiques and a new direction for the paper -- I had better improve it now to do justice to your input!

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