How do most low ETR firms avoid paying taxes?

Dane M. Christensen, David G. Kenchington, Rick C. Laux

Research output: Contribution to journalArticlepeer-review

17 Scopus citations


Evidence suggests a large proportion of profitable U.S. firms have low effective tax rates (i.e., an ETR between 0 and 10%). Despite widespread interest in how firms avoid paying taxes, we do not know how most firms attain low ETRs and whether they are primarily benefiting from benign or aggressive tax positions. Using a research design that explicitly examines low ETR firms, we predict and find that the majority are primarily benefiting from a benign tax position: large net operating loss carryforwards (NOLs). We also find that large NOLs allow firms to persistently retain low ETRs year after year. In contrast, we find that multinationals and tax haven firms, which should have more opportunities for aggressive tax planning, have a lower probability of attaining a low ETR (relative to domestic and non-tax haven firms). Collectively, these findings suggest that the typical low ETR firm does not incur significant tax risk. Consistent with this, we find that low ETR firms accrue unrecognized tax benefits at a similar rate as firms that pay the statutory tax rate and do not experience higher future tax rate volatility. Overall, the results shed light on the profile of the average low ETR firm and provide evidence that the majority are utilizing large NOLs rather than aggressive tax planning.

Original languageEnglish (US)
Pages (from-to)570-606
Number of pages37
JournalReview of Accounting Studies
Issue number2
StatePublished - Jun 2022


  • Net operating loss carryforwards
  • Political economy
  • Tax risk
  • Taxes

ASJC Scopus subject areas

  • Accounting
  • General Business, Management and Accounting


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