Corporate Tax Compliance Costs and Investments

Abstract

We examine the effects of tax compliance costs on firms’ investment. While reducing compliance
costs is an important tax policy objective, there is little empirical evidence regarding the investment
effects of such actions. Using two different settings, we show that lower compliance costs increase
firms’ investment. This effect is more pronounced among smaller firms and financially constrained
firms. We further find that lower compliance costs are associated with more foreign direct
investment and entrepreneurial activity. Our findings imply that reducing compliance costs can
have positive investment effects and that tax administration reforms can play an important role in
achieving compliance cost gains.

Keywords: Compliance costs, investment, tax administration

JEL Classification: D22, H25, H32