Corporate Tax Enforcement and Business Activity
51 Pages Posted: 28 Sep 2022 Last revised: 10 Feb 2024
Date Written: August 22, 2024
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, as measured by establishments and employment. 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. Specifically, we find that it is weaker for regions and firms with greater access to external financing sources, and is stronger for regions and firms where compliance costs are likely higher and for which the ex-ante costs of tax enforcement are greater. 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, compliance costs JEL codes: H25, H26, R11, R12
JEL Classification: H25, H26, R11, R12
Suggested Citation: Suggested Citation