Corporate Tax Avoidance, Firm Size, and Capital Misallocation
72 Pages Posted: 8 Feb 2024
Date Written: June 5, 2023
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
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