Corporate Tax Avoidance, Firm Size, and Capital Misallocation

72 Pages Posted: 8 Feb 2024

See all articles by Brent Glover

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business

Oliver Levine

University of Wisconsin - Madison - Department of Finance

Date Written: June 5, 2023

Abstract

We develop a general equilibrium model to study how corporate tax avoidance affects firm policies and aggregate outcomes. Tax avoidance and investment are complementary inputs, leading the largest firms to engage in the most avoidance and face the lowest effective tax rates, consistent with the data. We find that tax avoidance significantly increases both the average firm size and concentration, disproportionately benefiting large firms. Tax avoidance also generates capital misallocation, lowering productive efficiency and welfare. We estimate the model to quantify the costs and benefits of tax avoidance and evaluate the equilibrium effects of changes to the statutory tax rate and costs of avoidance.

Keywords: Corporate tax avoidance; Misallocation; Industry concentration; Corporate taxation; Corporate investment

JEL Classification: D24, E22, G31, G38, H21, H25, H26, L11, L16, L25, O47

Suggested Citation

Glover, Brent and Levine, Oliver, Corporate Tax Avoidance, Firm Size, and Capital Misallocation (June 5, 2023). Available at SSRN: https://ssrn.com/abstract=4699638 or http://dx.doi.org/10.2139/ssrn.4699638

Brent Glover

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Oliver Levine (Contact Author)

University of Wisconsin - Madison - Department of Finance ( email )

975 University Avenue
Madison, WI 53706
United States

HOME PAGE: http://oliverlevine.com

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