Why Do Not All Firms Engage in Tax Avoidance?

FAccT Center Working Paper Nr. 19/2014

48 Pages Posted: 11 Dec 2014 Last revised: 1 Jun 2016

See all articles by Martin Jacob

Martin Jacob

WHU - Otto Beisheim School of Management

Anna Rohlfing-Bastian

Goethe University Frankfurt

Kai Sandner

Ludwig Maximilian University of Munich (LMU)

Date Written: May 31, 2016

Abstract

Empirical evidence suggests that there is substantial cross-firm variation in the extent of tax avoidance. However, this variation is not well understood. This paper provides a theoretical background for testing, and thus explaining, cross-firm differences in tax avoidance. We develop a formal model with two agents to analyze the incentives that lead firms to engage in tax avoidance. The tax avoidance decision is a function of moral hazard, tax-planning costs, and the potential to increase earnings. If the potential to increase earnings is low, the tax-planning decision is determined by moral-hazard problems. In contrast, when this potential is high, the tax-planning decision is mainly driven by tax-planning costs, such as reputational and political costs. One implication of our model is that moral hazard can (partly) explain why some firms do not engage in tax avoidance: Severe problems of moral hazard make tax avoidance less likely. Our model can be applied to test differences in tax avoidance between different types of firms.

Keywords: moral hazard, tax avoidance, tax planning

JEL Classification: H25, M41

Suggested Citation

Jacob, Martin and Rohlfing-Bastian, Anna and Sandner, Kai, Why Do Not All Firms Engage in Tax Avoidance? (May 31, 2016). FAccT Center Working Paper Nr. 19/2014, Available at SSRN: https://ssrn.com/abstract=2536268 or http://dx.doi.org/10.2139/ssrn.2536268

Martin Jacob (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Anna Rohlfing-Bastian

Goethe University Frankfurt

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60629
Germany

Kai Sandner

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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