How Costly Is Tax Avoidance? Evidence from Structural Estimation

57 Pages Posted: 16 May 2019 Last revised: 3 Dec 2021

See all articles by Charles McClure

Charles McClure

University of Chicago Booth School of Business

Date Written: November 22, 2021

Abstract

I develop a structural model to quantify the costs of tax avoidance. In the model, the firm trades off tax savings with tax-audit risk, financial-reporting considerations, and operational frictions imposed by tax avoidance, the last of which I label as non-tax costs. The estimated parameters suggest non-tax costs, which are difficult to observe, decrease pretax income by 6.4%, or $58 million per firm-year. The large magnitude of this estimate can explain why firms appear to under-utilize tax-avoidance strategies. Through counterfactual analysis, I estimate the effect of tax-audit risk and financial-reporting considerations to find that financial-reporting considerations have an effect on tax avoidance similar to the penalties imposed by tax authorities. Overall, the estimated parameters help explain the “undersheltering puzzle.”

Keywords: Tax avoidance; undersheltering; non-tax costs; FIN48; structural estimation

JEL Classification: G14, H21, H25, H26, M41, M48

Suggested Citation

McClure, Charles, How Costly Is Tax Avoidance? Evidence from Structural Estimation (November 22, 2021). Chicago Booth Research Paper No. 19-14, Fama-Miller Working Paper, Available at SSRN: https://ssrn.com/abstract=3373777 or http://dx.doi.org/10.2139/ssrn.3373777

Charles McClure (Contact Author)

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

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