Government Deficits and Corporate Tax Avoidance

45 Pages Posted: 13 May 2022 Last revised: 11 Nov 2022

See all articles by Mary Cowx

Mary Cowx

Arizona State University (ASU) - W.P. Carey School of Business

Felipe Bastos G. Silva

University of Missouri, Columbia

Kelvin Yeung

City University of Hong Kong (CityU) - College of Business

Date Written: November 9, 2022

Abstract

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

Cowx, Mary and Silva, Felipe Bastos G. and Yeung, Kelvin, Government Deficits and Corporate Tax Avoidance (November 9, 2022). Available at SSRN: https://ssrn.com/abstract=4060416 or http://dx.doi.org/10.2139/ssrn.4060416

Mary Cowx

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Felipe Bastos G. Silva (Contact Author)

University of Missouri, Columbia ( email )

331 Cornell Hall
Columbia, MO 65211
United States
5738829905 (Phone)

Kelvin Yeung

City University of Hong Kong (CityU) - College of Business ( email )

83 Tat Chee Avenue
Academic Building (LAU)
Kowloon Tong, 12200
Hong Kong

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