Corporate Tax Avoidance and the Real Effects of Taxation: A Review

Abstract

The tax literature of the past two decades has been dominated by empirical studies on corporate tax avoidance. What this literature lacks, however, are a quantitative synthesis of these studies and an in-depth discussion of potential convergences and divergences in empirical findings. To thoroughly evaluate empirical results, we provide a comprehensive theoretical framework that allows us to not only organize the vast tax avoidance literature, but also identify under-explored yet fruitful research areas. Specifically, we derive theoretical predictions on how various determinants affect the tax avoidance decision of a profit-maximizing firm. We further theoretically assess the consequences and real effects of tax avoidance. In a subsequent step, we link our theoretical predictions to a quantitative synthesis of all empirical tax avoidance studies published in the top accounting, finance, and economics journals over the last two decades. Combining theoretical predictions with a quantitative synthesis allows us to identify potential empirical inconsistencies and areas for future tax research.

Keywords: Tax Avoidance, Literature Review, Real Effects, Quantitative Synthesis

JEL Classification: M48, M41, H25, H26