Avoiding Taxes to Fix the Tax Code

72 Pages Posted: 3 May 2019

See all articles by Antonio De Vito

Antonio De Vito

IE University; Fundación Instituto de Empresa, S.L. - IE Business School

Martin Jacob

WHU - Otto Beisheim School of Management

Maximilian A. Müller

WHU - Otto Beisheim School of Management

Date Written: April 2, 2019

Abstract

Most corporate tax codes distort capital investment decisions because the deductibility of the cost of capital investment is limited. We examine whether this tax code friction leads firms to avoid taxes to mitigate this capital investment distortion. Exploiting increases in capital deepening incentives stemming from stricter employment protection, we find that firms avoid more taxes and their capital deepening response increases with tax avoidance opportunities, both especially when the deductibility of the cost of capital investment is limited. These findings suggest that tax avoidance helps firms reap investment opportunities that they would otherwise have forgone because of tax code frictions.

Keywords: Tax distortions, tax avoidance, employment protection, labor regulation

JEL Classification: G32, H26, J63, K31, M41

Suggested Citation

De Vito, Antonio and Jacob, Martin and Müller, Maximilian A., Avoiding Taxes to Fix the Tax Code (April 2, 2019). Available at SSRN: https://ssrn.com/abstract=3364387 or http://dx.doi.org/10.2139/ssrn.3364387

Antonio De Vito

IE University ( email )

Calle Pedro de Valdivia 21
Madrid, Madrid 28006
Spain

Fundación Instituto de Empresa, S.L. - IE Business School ( email )

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

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

Maximilian A. Müller

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
32
Abstract Views
308
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information