Determinants and Variability of Effective Tax Rates: Evidence from S&P 500 Companies

The tax burden on companies represents a significant component of their cost structure and a major responsibility to the governments of each jurisdiction where they earn income. This study examines the determinants of effective tax rates among companies in the Standard and Poor’s 500 (S&P 500), motivated by the phenomenon of significant variability in the effective tax rates paid by each company, despite government
efforts towards fiscal uniformity. Grounded in Institutional Theory, the study explores the coercive, normative, and mimetic pressures inherent to the activities of the examined companies and how these pressures influence their tax practices. The analysis consists of a qualitative study of a sample of annual reports from 50 companies over a 10-year period (2014-2023), conducted using NVIVO software. The results reveal several key factors contributing to the reduction of effective tax rates, including the use of deferred tax assets, investment in tax-advantaged securities, and strategic intellectual property management. Conversely, factors increasing effective tax rates include tax audit resolutions and changes in income composition. These findings necessitate further research to understand the magnitude and generality of their effects across different companies and industries. This study contributes to understanding the variables that influence effective tax rates, which have not been extensively explored in the literature to date. Additionally, the study explains the coercive, normative, and mimetic pressures experienced by companies and reinforces Institutional Theory by examining this phenomenon, which is inherently associated with various institutional pressures.