No. 201: Tax Complexity and Firm Value

Year: 2025
Type: Working Paper

Abstract

This study examines the effect of tax complexity on the market value of publicly traded firms. Using firm-level measures of tax complexity, we find that a one standard deviation increase in tax complexity—comparable in magnitude to the rise following the U.S. Tax Cuts and Jobs Act—is associated with a 2.6% decline in Tobin’s Q. The effect is particularly pronounced for complexity arising from anti-avoidance regulations and post-filing procedures. The negative valuation effect is more substantial for firms with limited opportunities for international profit shifting, weak governance, or low internal information quality. Further analyses reveal that tax system complexity is associated with a reduced growth potential of firms and less R&D and thus negative real responses that go beyond negative investment effects. Overall, our findings provide novel evidence of the economic costs of tax complexity and contribute to the debate on the design of efficient and equitable tax systems.

 

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, Goethe University Frankfurt, University of Cologne and Leibniz University Hannover who share the same research agenda.

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