Does Corporate Tax Planning Affect Firm Productivity?
69 Pages Posted: 8 Jun 2021 Last revised: 21 Nov 2022
Date Written: December 7, 2021
We examine the relation between corporate tax planning and firm-level productivity. Using a sample of U.S. public firms from 1993 to 2017, we find that lower effective tax rates are associated with higher productivity. Tax planning mutes the tax wedge on productive inputs and facilitates capital and labor investments. We provide evidence of two channels underlying the observed link. First, tax planning enables firms to scale up and benefit from economies of scale. Second, tax planning raises the marginal return on innovation and firms respond with increased knowledge capital intensity. Our findings are insensitive to a litany of robustness tests. We exploit the introduction of Check-the-Box regulation and the implementation of an Irish tax reform as exogenous sources of tax planning variation to facilitate Difference-in-Differences analyses. Our findings enhance the understanding on the economic implications of tax planning, and could provide insights for informed tax policy debates.
Keywords: Check-the-Box, Corporate tax planning, Irish tax havens, Productivity, TFP
JEL Classification: D24, H21, H25, H26, J24
Suggested Citation: Suggested Citation