Private Equity and Taxes

Abstract

We study corporate tax avoidance and associated real effects of private equity buyouts.
Exploiting over 12,000 deals and private firm data in Europe, we document that target firms' effective tax rates decrease by 15% after the buyout. Those targets engaging in significant post-deal tax avoidance invest less in physical assets and employment, suggesting that corporate tax avoidance serves as a cost-cutting channel for buyouts with moderate growth potential. Exploiting the staggered nature of buyouts at the local geographic and industry levels, we document that private equity ownership negatively impacts corporate tax revenues as well as industry-wide effective tax rates and tax payments without creating positive spillovers for other tax bases. Collectively, our findings suggest that some private equity investors impose a negative externality on local domestic governments through increased tax avoidance in target firms.

Keywords: Private Equity, Leveraged Buyouts, Corporate Taxation, Investments, Tax Avoidance, Tax Revenue

JEL Classification: G31, G34, H26