A Re-examination of Firm Size and Taxes

34 Pages Posted: 24 Sep 2021

See all articles by Fabio B. Gaertner

Fabio B. Gaertner

University of Wisconsin - Madison - Department of Accounting and Information Systems

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business

Oliver Levine

University of Wisconsin - Madison - Department of Finance

Date Written: September 21, 2021

Abstract

We document that larger firms pay substantially lower cash effective tax rates (cash ETRs) in the long-term than do smaller firms. This pattern in long-term cash ETRs is robust to various specifications, but vanishes when cash ETRs are measured over a single year. Over a ten-year period, firms in the largest decile pay 10.8 p.p. (26 percent) lower taxes than those in the smallest decile, while this gap balloons to 14.4 p.p. (35 percent) for the largest 1 percent of firms. The relation between firm size and taxes over the long run cannot be explained by foreign operations, asset tangibility, R&D spending, capital structure, net operating loss carryforwards, or releases in the valuation allowance. While profitability explains near a quarter of this effect, about 80 percent of the association between size and taxes can be explained by the magnitude of losses within the horizon period. Overall, our results suggest large firms pay fewer taxes over the long run primarily by avoiding losses, potentially mitigating the negative consequences of tax convexity.

Keywords: Firm size, taxes

JEL Classification: H25, H26, L25

Suggested Citation

Gaertner, Fabio B. and Glover, Brent and Levine, Oliver, A Re-examination of Firm Size and Taxes (September 21, 2021). Available at SSRN: https://ssrn.com/abstract=3928145 or http://dx.doi.org/10.2139/ssrn.3928145

Fabio B. Gaertner (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Oliver Levine

University of Wisconsin - Madison - Department of Finance ( email )

975 University Avenue
Madison, WI 53706
United States

HOME PAGE: http://oliverlevine.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
140
Abstract Views
450
rank
283,769
PlumX Metrics