Military experience and corporate tax avoidance

Bamber et al. (2010, p. 1153) also discuss this observation.

We do not claim that tax avoidance is unethical. We note that Judge Learned Hand once stated: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands” [Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff'd, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935)]. Our conjecture about the effect of military experience is motivated by prior research and anecdotes about military value and culture (e.g., Bamber et al. 2010; Benmelech and Frydman 2015). Examining the voting patterns of accounting standard setters, Jiang et al. (2014) also find that board members with military experience are more likely to cast dissenting votes.

http://​archive.​fortune.​com/​galleries/​2012/​fortune/​1205/​gallery.​500-military-ceos.​fortune/​6.​html.

Crocker and Slemrod (2005) also show that, to dampen corporate tax evasion in principal-agency model, it is more effective to impose penalties directly on managers than on shareholders.

For instance, Weisbach (1995), Chevalier and Ellison (1999), Bertrand and Schoar (2003), Bamber et al. (2010), Ge et al. (2011), and Graham et al. (2012).

Although some academic research uses the term “evasion,” we use the term “avoidance” throughout our manuscript, because from the IRS’s point of view, evasion connotes illegal tax reduction. Corporate tax rules are generally subject to substantial judgment about the application of complex law to complex facts, so most proposed audit adjustments by tax authorities relate to issues that at best are viewed as aggressive by tax authorities, not strictly as evasion with attendant penalties. Hanlon et al. (2007) document the rare application of penalties in the context of corporate tax compliance.

For example, interviewed by media, Google’s CEO responds, “I am very proud of the structure that we set up,” and calls its tax avoidance “just capitalism” (Telegraph 2012; Independent 2013). And GE—claiming a tax benefit of $3 billion while reporting worldwide profits of $14 billion (New York Times 2011)—is regularly in the news where its CEO is “happy to defend” its taxes.

We focus on the heterogeneity in corporate ETRs—the broadest measures for capturing the full continuum of firms’ tax planning—between managers with military experience and those without.

In 2008, Vice Presidential nominee Joe Biden exhorted: “It’s time to be patriotic … time to help get America out of the rut” (“Biden calls paying higher taxes a patriotic act”; Associated Press 2008). In 1942 Donald Duck promoted paying taxes to “fight the Axis,” and taxpayers filed tax returns more promptly than ever before (http://​www.​disneyfilmprojec​t.​com/​2010/​09/​new-spirit.​html).

Other related military experience includes Coast Guard and military reserve forces. Our results are robust whether military experience is defined narrowly or broadly. Unfortunately, the Marquis Who’s Who does not necessarily disclose combat experience. However, see Table 4 for tests of academy training or major conflict experience.

As military service is primarily a male-dominated profession, women are still greatly under-represented in the military: only one female CEO in our sample, Sandy B. Cochran, has military experience.

Fee et al. (2013) caution against using a standard F-test for joint significance of manager FEs, as standard asymptotic theory does not apply and the properties of these tests are unknown. However, using Monte Carlo simulations, Orme and Yamagata (2006) show that standard F-test procedures perform well even under non-normality or in a small sample.

In untabulated results, we directly compare the estimated coefficients between Military Experience and MBA Education. All F-tests testing the equality of these estimated coefficients indicate that the estimated coefficients on Military Experience are consistently larger and more statistically significant than the ones on MBA Education.

The estimated coefficients on Military Experience range from 0.941 % (t-statistic: 2.39) to 1.407 % (t-statistic: 2.09). The average differences in long-run cash (GAAP) ETRs are economically significant at 7.9–10.0 % (10.4–11.3 %) of the untabulated interquartile range of 14.09 % (9.04 %). In untabulated results, we also consider leading k-year long-run ETRs and find that Military Experience is associated with higher ETRs up to 7 years in the future.

We would like to examine the difference between officer and enlisted experience, but this information is not regularly disclosed in Who’s Who. However, if officers are more likely to stay in the military longer, then our additional analyses using Length of Military Services or Attended Military Academy also provide indirect evidence that rank does not determine tax avoidance.

This result is not robust to using only the presence of a tax haven as the dependent variable, although this is not a powerful test because 71 % of firms have a subsidiary in a tax haven. We also introduce Ln(Num of Countries) as an additional control for the extent of multi-nationality. The coefficients on Military Experience remain significant, though smaller in magnitude, in the Tax Havens Top User regressions. We further examine the portion of Big 7 tax havens (including Hong Kong, Ireland, Lebanon, Liberia, Panama, Singapore, and Switzerland) used to the total number of tax havens used. Number of Big 7 Tax Havens equals the natural logarithm of one plus the number of Big 7 tax havens in Exhibit 21, and Big 7 Havens Top User is an indicator variable that equals one when a firms’ number of Big 7 tax haven subsidiaries is in the top quintile for the year. In untabulated tests, military managers have fewer operations in Big 7 havens and are less likely to be top users of these Big 7 havens, with almost all specifications (with or without foreign income, or with baseline or all controls) significant at 10 %.

See Angrist (1990), Angrist and Krueger (1994), Bedard and Deschênes (2006), Lin et al. (2011), Bedard and Deschênes (2011) and Benmelech and Frydman (2015).

We also considered using date of birth for possible instruments of selecting CEOs with military experience following the well-known Vietnam Draft Lottery by Angrist (1990). To examine this, we collected the exact CEOs’ dates of birth from Who’s Who and Boardex, and successfully identified the dates of birth of 2075 CEOs. Six hundred one CEOs were born between 1944 and 1952 and potentially subject to the Vietnam draft. First, among 283 CEOs who were supposed to be drafted, we find that only 20 % (n = 58) have military experience. This suggests that many executives with low draft numbers seemed able to defer their drafts. Based on our searches, some of these executives defer their drafts by pursuing college educations in either local or overseas institutions (e.g., Canada), which is consistent with the findings in Card and Lemieux (2001). On the other hand, among the other 318 CEOs who were not supposed to be drafted, 17 % have military experience, suggesting they volunteered even though not drafted. Overall, the correlation between having military experience and being drafted is quite low at approximately 4 %, even during the Vietnam War. This suggests that, for executives, date of birth is a poor instrument for capturing their exogenous probability for military service in Vietnam, although it is likely a worthy instrument for other groups of young men where the likelihood of college deferments would be lower than for future CEOs.

Even though our sample is shorter and spans fewer years, our second-stage 2SLS results are stronger than those in Benmelech and Frydman (2015) IV tests of whether military CEOs are less likely to conduct alleged corporate fraud.

Untabulated results using the county Catholic-to-Protestant ratio are similar, with estimated coefficients on Military Experience of 1.608 % (t-statistic: 2.06) for Cash ETR and 1.219 % (t-statistic: 2.98) for GAAP ETR.

Class action lawsuits typically arise from precipitous stock price declines and are only arguably related to corporate misconduct when also associated with restatements or fraud (Donelson et al. 2012).

Finally, military CEOs should want to conserve U.S. resources because military personnel face strong injunctions not to exceed budgets (United States Constitution, Article 1, Section 9, Clause 7; 16 Statute 251, 107 Act of July 14, 1870; 31 USC Section 134, January 3, 2012; and Federal Acquisition Regulation, Subpart 32.7, Section 32.702).

A common example for doing the right thing is “getting in line.” Although queue jumping is not illegal, it is commonly perceived in Western culture as unethical. The construct of doing the right thing is described by Traditional Values in the 1994 Jackson Personality Inventory (1994). As a component of its dependability cluster, the JPI-R assesses a Traditional Values scale to represent the degree to which an individual adheres to conservative, “old-fashioned” values such as honesty, frugality, modesty, respect for authority, and patriotism. Consistent with those ideas, the U.S. Armed Forces’ Requirements of Exemplary Conduct (10 USC § 3583) states the following: All commanding officers and others in authority in the Army are required—

Military honor codes also explicitly embody moral values:

None of the CEOs of the high-profile multinational firms mentioned above have served in the military.

http://​www.​cbsnews.​com/​news/​starbucks-ceo-howard-schultz-announces-30-million-gift-for-us-troops/​.