A Re-examination of Firm Size and Taxes

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. Our findings stand in contrast to the two dominant theories ascribing the association between firm size and taxes to political activities, instead suggesting that the asymmetric tax treatment of profits and losses is first order in understanding the significant tax differentials we document. A cross-country analysis supports these findings.

Keywords: Firm size, taxes

JEL Classification: H25, H26, L25