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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jpubeco.2005.02.006 Byline: Dhammika Dharmapala Abstract: This paper compares the Congressional budget process (instituted in 1974) and the piecemeal appropriations process that preceded it. Previous theoretical analysis using spatial models of legislator preferences finds no systematic difference in relative spending levels under the two regimes. This paper instead uses a model of interest group lobbying. A legislature determines spending on a national public good and on subsidies to sector-specific interest groups. In the 'appropriations process,' the Appropriations Committee proposes a budget that, because of interest group influence, involves overspending on subsidies. In the 'budget process,' the Budget Committee proposes an aggregate level of spending (the budget resolution); then, the Appropriations Committee proposes a budget. A free rider problem among the interest groups inhibits the lobbying of the Budget Committee to increase the aggregate budget. If each group is sufficiently small, it takes the budget resolution as given, and lobbies the Appropriations Committee. Aggregate spending is lower and social welfare is higher under the budget process; however, provision of the national public good is suboptimal. The paper also analyzes statutory budget rules that limit spending levels, but can be revised by a simple majority vote. Here, the free rider problem prevents the groups from securing the required changes to budget rules. Author Affiliation: Department of Economics, University of Connecticut, 341 Mansfield Rd., U-1063, Storrs, CT 06269-1063, United States Article History: Received 19 December 2003; Revised 21 December 2004; Accepted 18 February 2005

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jfineco.2005.02.002 Byline: Mihir A. Desai (a)(b), Dhammika Dharmapala (c) Keywords: Incentive compensation; Corporate governance; Tax avoidance; Stock options; Tax evasion Abstract: This paper analyzes the links between corporate tax avoidance and the growth of high-powered incentives for managers. A simple model demonstrates the role of feedback effects between tax sheltering and managerial diversion in determining how high-powered incentives influence tax sheltering decisions. A novel measure of corporate tax avoidance (the component of the book-tax gap not attributable to accounting accruals) allows for an investigation of the link between tax avoidance and incentive compensation. Increases in incentive compensation tend to reduce the level of tax sheltering, in a manner consistent with a complementary relationship between diversion and sheltering. In addition, this negative effect is driven primarily by firms with relatively weak governance arrangements, confirming a central prediction of the model. These results can help explain the growing cross-sectional variation among firms in their levels of tax avoidance, the undersheltering puzzle, and why large book-tax gaps are associated with subsequent negative abnormal returns. Author Affiliation: (a) Harvard Business School, Morgan Hall 363, Boston, MA 02163, USA (b) National Bureau of Economic Research, Cambridge, MA 02138, USA (c) University of Connecticut, 341 Mansfield Road, Storrs, CT 06269, USA Article History: Received 22 April 2004; Revised 21 December 2004; Accepted 4 February 2005 Article Note: (footnote) [star] We would like to thank an anonymous referee, Alan Auerbach, Amy Dunbar, Alexander Dyck, Austan Goolsbee, Dirk Jenter, Mark Lang, Bryan Lincoln, John Phillips, Gary Richardson, Justin Tobias, Luigi Zingales, and various conference and seminar participants for valuable discussions and comments on an earlier version of this paper. We also thank Nathan Koppel and Philip West for their help with the example in . Mihir A. Desai acknowledges the financial support of the Division of Research of Harvard Business School, and Dhammika Dharmapala acknowledges the financial support of the University of Connecticut Research Foundation. Michael Park provided excellent research assistance.

The impact of legislative committee structure on policy outcomes was examined through a comparison of a decentralized system of specialized committees and a tax committee. A model of endogenous commodity taxation was used as the underlying framework of the study. Results reveal that the tax committee structure leads to lower subsidy levels under a wide range of assumptions. The theoretical findings are used to elucidate two historical episodes involving institutional changes in the US Congress.