A Re-examination of Firm Size and Taxes

47 Pages Posted: 24 Sep 2021 Last revised: 26 Apr 2024

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: April 25, 2024

Abstract

We document that larger firms pay substantially lower cash effective tax rates (cash ETRs) over the long run than smaller firms. Over a ten-year period, firms in the largest decile pay 10.4 p.p. (25 percent) lower cash 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. This pattern is robust to various specifications but vanishes when cash ETRs are measured annually. The relation between firm size and taxes over the long run cannot be explained by foreign operations, depreciation, R&D spending, or stock compensation; characteristics commonly associated with aggressive tax practices. Meanwhile, the observed tax inequality is strongly associated with the incidence of losses. Results from cross-country tests confirm our U.S. results. Our findings stand in contrast to the two dominating theories ascribing the association between firm size and taxes to political activities, suggesting the incidence of losses is first-order in understanding the significant tax inequality we document.

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 (April 25, 2024). 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

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