Corporate Tax Enforcement and Business Activity

54 Pages Posted: 28 Sep 2022 Last revised: 4 Jun 2023

See all articles by John Gallemore

John Gallemore

University of North Carolina Kenan-Flagler Business School

Martin Jacob

WHU - Otto Beisheim School of Management

Date Written: June 2023

Abstract

We examine the consequences of corporate tax enforcement for business activity. Employing two different empirical approaches—a regional design and a firm-level design—we document that corporate tax enforcement is negatively associated with business activity. This association is economically significant and is robust to tests that mitigate concerns regarding endogeneity and measurement. Furthermore, we find that the negative association between tax enforcement and business activity varies substantially in the cross-section: it is stronger for regions and firms for which access to external financing sources is more restricted, for which compliance costs are likely higher, and for which the ex-ante costs of tax enforcement are greater. Furthermore, we find that tax enforcement aimed at one firm can affect the business activity of connected firms. Our findings suggest that the effects of tax enforcement on business activity are economically important and heterogeneous, which should be of interest to academics and policymakers.

Keywords: corporate tax enforcement, business activity, local economies, employment

JEL Classification: H25, H26, R11, R12

Suggested Citation

Gallemore, John and Jacob, Martin, Corporate Tax Enforcement and Business Activity (June 2023). Available at SSRN: https://ssrn.com/abstract=4226165 or http://dx.doi.org/10.2139/ssrn.4226165

John Gallemore (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.johngallemore.com

Martin Jacob

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

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