Government Deficits and Corporate Tax Avoidance
45 Pages Posted: 13 May 2022 Last revised: 11 Nov 2022
Date Written: November 9, 2022
We investigate how government deficits affect corporate-tax avoidance. We find that deficits are positively associated with corporate-tax avoidance, consistent with a deterioration in the government’s finances leading to expectations of weaker tax enforcement or future tax increases. To disentangle the effect of deficits from other macroeconomic conditions, we perform an instrumental variables estimation using military-spending data and two event studies exploiting the Carter-Reagan military buildup and the end of the Cold War. Altogether, our results underscore an important unintended consequence of increasing government deficits, with important implications for corporate-tax collection and fiscal stability.
Keywords: Government Deficits; Tax Avoidance; Tax Enforcement; Political Economy
JEL Classification: H20, H26, H62
Suggested Citation: Suggested Citation