How Do Most Low ETR Firms Avoid Paying Taxes?

Review of Accounting Studies, Forthcoming

75 Pages Posted: 6 Jan 2021

See all articles by Dane M. Christensen

Dane M. Christensen

University of Oregon

David G. Kenchington

Arizona State University (ASU) - School of Accountancy

Rick Laux

Purdue University

Date Written: November 30, 2020


Evidence suggests a large proportion of profitable U.S. firms have low effective tax rates (i.e., an ETR between 0 and 10 percent). 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.

Keywords: Taxes, Net operating loss carryforwards, Tax risk, Political economy

JEL Classification: H26, G38, M41

Suggested Citation

Christensen, Dane M. and Kenchington, David G. and Laux, Rick C., How Do Most Low ETR Firms Avoid Paying Taxes? (November 30, 2020). Review of Accounting Studies, Forthcoming, Available at SSRN: or

Dane M. Christensen

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

David G. Kenchington (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Rick C. Laux

Purdue University ( email )

Rawls Hall 4036
100 S. Grant Street
West Lafayette, IN 47906
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics