Tax Incidence and Tax Avoidance

Abstract

Economists broadly agree that the economic burden of corporate taxes is not entirely borne by shareholders, but also borne in part by employees and consumers. We examine corporate tax avoidance in a setting where shareholders do not bear the entire economic burden of the corporate tax. We show the relation between corporate tax incidence and corporate tax avoidance depends on the elasticity of labor supply, the productivity of capital relative to labor, and the tax deductibility of labor and capital. These forces operate through two channels (“firm scale” and “input mix”), making the actual association between tax avoidance and incidence an empirical question. We find that firms whose shareholders bear less of the economic burden of corporate taxes engage in less avoidance. Our findings suggest that maximizing after-tax profits might entail less tax avoidance if shareholders do not entirely bear the corporate tax burden.

Keywords: Tax avoidance, tax burden, tax incidence

JEL Classification: H20, H25