Employment Protection and Tax Aggressiveness: Evidence from Wrongful Discharge Laws
61 Pages Posted: 19 Feb 2019 Last revised: 30 Jul 2020
Date Written: July 28, 2020
Abstract
We examine whether labor market frictions affect firms’ tax aggressiveness. Exploiting the adoption of U.S. state-level Wrongful Discharge Laws as a quasi-exogenous shock to a firm’s firing costs, we document a decline in tax aggressiveness for firms located in states that increase employment protection. We further show that greater employment protection increases distress risk. The decline in tax aggressiveness is more pronounced for firms that are more vulnerable to financial distress and constrained from external financial markets. Our results imply that firms avoid risky tax positions in order to mitigate increased distress risk due to more rigid labor costs.
Keywords: tax aggressiveness; employment protection; Wrongful Discharge Laws; firing costs; distress risk
JEL Classification: G31; G38; H26
Suggested Citation: Suggested Citation