Labor Unemployment Risk and Tax Aggressiveness

30 Pages Posted: 3 May 2013

See all articles by Erik Devos

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Shofiqur Rahman

University of Texas at El Paso

Date Written: May 1, 2013

Abstract

This paper examines whether firms exhibit less tax aggressiveness in order to mitigate workers’ exposure to unemployment risk. We use unemployment insurance (UI) benefit laws as a proxy for unemployment risk and multiple measures of tax aggressiveness. Given that tax aggressiveness is risky and costly for the firm and its employees, we argue that high state UI benefits lower labor unemployment risk and, hence provide firms with an opportunity to exhibit more tax aggressiveness. Consistent with this hypothesis, we find a negative relation between firms’ tax aggressiveness and unemployment risk. In additional analysis, we also find that the negative relation is more pronounced for firms in industries that are more labor intensive. Our results are robust to the exclusion of industries with a dispersed labor force and an alternative proxy for unemployment risk. Overall, our findings suggest that labor market frictions have implications for corporate tax policy.

Keywords: Unemployment risk, Compensating wage differentials, Unemployment insurance benefit, Tax aggressiveness

JEL Classification: J31, J65, H25

Suggested Citation

Devos, Erik and Rahman, Shofiqur, Labor Unemployment Risk and Tax Aggressiveness (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=2259199 or http://dx.doi.org/10.2139/ssrn.2259199

Erik Devos (Contact Author)

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915 747 7770 (Phone)

HOME PAGE: http://utminers/utep.edu/hdevos

Shofiqur Rahman

University of Texas at El Paso ( email )

El Paso, TX TX

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