Measuring Income Mobility

Source: Lisa De Simone, Lillian F. Mills, Bridget Stomberg, Rock Center for Corporate Governance at Stanford University Working Paper No. 192, June 14, 2014

From the abstract:
Can a single summary statistic identify firms that successfully conduct long-term, sustainable tax avoidance? We develop a measure of income mobility, which synthesizes several firm-level characteristics that reflect ex ante opportunities to exploit multi-jurisdictional tax planning. We then test income mobile tax avoidance along several dimensions. We find that income mobile firms engage in more long-term tax avoidance, such as international income shifting, than non-income mobile firms. Additionally, income mobile tax avoidance is more sustainable: income mobile firms have more persistent and less volatile cash effective tax rates and retain a greater portion of uncertain tax benefits than non-income mobile firms. Market tests using Tobin’s q confirm that investors place a higher value on cash tax savings generated by income mobile firms, consistent with investors understanding and valuing persistent, sustainable tax avoidance. These findings contribute to our understanding of the risk-reward trade-off of multi-jurisdictional tax avoidance. Our contribution is constructing a composite measure that more powerfully explains sustainable tax avoidance than any single component of the measure. This measure is useful for researchers, policy makers, and regulators seeking to identify and analyze firms with similar opportunities for tax avoidance based on fundamental business operations.