Abstract
Increasingly fragmented corporation regulation in recent decades has raised the likelihood of regulatory oversight spillovers—the extent to which one agency’s interactions with a regulated firm affects firm behaviors under the purview of another agency. We study how such spillovers can affect the mission of a specific regulator—the tax authority—using a measure of firm-specific exposure to fragmented regulation. Using a sample of publicly-traded U.S. firms, we document that fragmented regulation across non-IRS U.S. agencies is associated with higher effective tax rates, consistent with non-IRS oversight constraining tax planning, which is the purview of the tax authority. This association is robust to a variety of different research designs, including a shift-share approach. Importantly, we find that this association is driven by regulations and regulators that employ documentation collection as part of their enforcement mandates, suggesting that the potential for information sharing across regulatory agencies is a key mechanism underlying our findings. We also find that this relation is (i) increasing in the overall amount of regulation the firm faces, (ii) the relative absence of IRS auditing and alternative (e.g., capital market) monitors, and (iii) holds for both domestic and multinational firms. Collectively, our findings suggest that oversight from non-tax authority regulators can potentially enhance the tax authority’s ability to enforce its mandate.
Key Findings
Oversight Spills Into Tax
A one-standard-deviation increase in exposure to fragmented non-IRS regulation is associated with a 1.5 percentage-point higher cash effective tax rate—about 5.7% of the 26.4% sample mean—consistent with non-tax oversight constraining tax planning (39,753 firm-years, 1995–2019).
Documentation Is the Mechanism
The effect is concentrated in agencies whose rules impose information-collection (Paperwork Reduction Act) requirements; fragmentation among non-documentation agencies is insignificant. The paper trail a firm creates for one regulator can deter aggressive tax positions before the IRS ever requests it.
Which Regulators Matter
In a leave-one-out analysis across 121 non-IRS agencies, the SEC contributes most (dropping it cuts the coefficient by 0.81 percentage points), followed by the EPA, CFPB, and Department of Labor—all heavy documentation regulators.
A Substitute for Other Monitors
The association is stronger when overall regulatory oversight is greater, and weaker when the firm is already disciplined by an IRS audit, high institutional ownership, or analyst coverage. It holds for both domestic firms and multinationals, rising with the number of tax-haven subsidiaries.
Research Contribution
The paper introduces the idea of regulatory oversight spillovers—one agency’s interactions with a firm affecting behaviors under another agency’s purview—and brings it to the tax authority. Using a firm-specific measure of exposure to fragmented regulation across publicly traded U.S. firms, it shows that non-tax oversight constrains tax planning and raises effective tax rates.
The mechanism is documentation rather than direct enforcement: complying with another agency’s paperwork creates records the IRS could later obtain, so firms rationally scale back aggressive positions before any request is made. The results connect the literatures on regulation and tax avoidance and carry a policy lesson—regulatory paperwork imposes compliance costs on firms, but can also spill over to strengthen a different regulator’s mandate.