Avoiding Taxes to Fix the Tax Code
72 Pages Posted: 3 May 2019
Date Written: April 2, 2019
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: Suggested Citation