Avoiding Taxes to Fix the Tax Code

74 Pages Posted: 3 May 2019 Last revised: 11 Nov 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: November 10, 2019

Abstract

Most corporate tax codes constrain capital investment because the cost of capital investment is usually not fully deductible from taxable income. We examine whether firms avoid taxes to loosen such tax code constraints on their investment. Exploiting increases in capital investment incentives from stricter employment protection, we find that firms avoid more taxes and their capital investment response increases with tax avoidance opportunities, both especially when the deductibility of capital investment costs is limited. These findings suggest that tax avoidance mitigates the distortions from tax code constraints on investment.

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 (November 10, 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

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