Tax incidence and tax avoidance

Abstract

Economists broadly agree that the economic burden of corporate taxes is not entirely borne by shareholders but also borne in part by employees and consumers. We examine corporate tax avoidance in a setting where shareholders do not bear the entire economic burden of the corporate tax. We show that the relation between corporate tax incidence and corporate tax avoidance depends on the elasticity of labor supply, the productivity of capital relative to labor, and the tax deductibility of labor and capital. These forces operate through two channels (firm scale and input mix), making the actual association between tax avoidance and incidence an empirical question. We find that firms whose shareholders bear less of the economic burden of corporate taxes engage in less avoidance. Our findings suggest that maximizing after-tax profits might entail less tax avoidance if shareholders do not entirely bear the corporate tax burden. In particular, when the incidence of the corporate tax falls on the firm, firms avoid more taxes. This tendency is stronger if firms use a higher level of capital input, if the deductibility of cost of capital investment is limited, if firms have high capital productivity, or if tax enforcement is strong.

Beteiligte Institutionen

Die Hauptstandorte vom TRR 266 sind die Universität Paderborn (Sprecherhochschule), die HU Berlin und die Universität Mannheim. Alle drei Standorte sind seit vielen Jahren Zentren für Rechnungswesen- und Steuerforschung. Hinzu kommen Wissenschaftler der LMU München, der Frankfurt School of Finance and Management, der WHU – Otto Beisheim School of Management, der ESMT Berlin, der Goethe-Universität Frankfurt und der Carl von Ossietzky Universität Oldenburg, die die gleiche Forschungsagenda verfolgen.