Tax Avoidance at Public Corporations Driven by Shareholder Taxes: Evidence from Changes in Dividend Tax Policy
The Accounting Review, Forthcoming
61 Pages Posted: 18 Jul 2012 Last revised: 20 Dec 2018
Date Written: June 19, 2018
We exploit changes in a country’s integration of corporate and shareholder taxes to identify the effect of investor-level taxes on costly corporate tax avoidance. Specifically, we rely on European countries eliminating imputation systems in different years in response to supranational judicial rulings. These eliminations, which are exogenous to the firm, remove managers’ disincentive to engage in tax avoidance if they consider investor-level taxes. Using a difference-in-differences model with fixed effects, we find that the average firm affected by an elimination reduces its cash effective tax rate by 5.5 percent. Placebo tests support that this effect is present only for countries and years for which eliminations occur. Consistent with our cross-sectional predictions, we find that the results are stronger for firms with lower growth opportunities, higher dividend payout, lower foreign income, and higher closely held ownership. Further analysis provides evidence consistent with shifting income to foreign countries as one method of tax avoidance employed.
Keywords: corporate tax avoidance, public corporations, imputation, shareholder dividend taxes
JEL Classification: G38, G32, G15, H26
Suggested Citation: Suggested Citation