How Costly Is Tax Avoidance? Evidence from Structural Estimation
Forthcoming, The Accounting Review
75 Pages Posted: 16 May 2019 Last revised: 16 Apr 2023
Date Written: January 31, 2023
Abstract
I develop a structural model to quantify the costs of tax avoidance. In the model, the firm trades off tax savings with tax-audit risk, financial-reporting considerations, and operational frictions imposed by tax avoidance, the last of which I label as non-tax costs. The estimated parameters suggest non-tax costs, which are difficult to observe, decrease pretax income by 6.4% or $58 million per firm-year. The large magnitude of this estimate can explain why firms appear to under-utilize tax-avoidance strategies. Through counterfactual analysis, I estimate the effect of tax-audit risk and financial-reporting considerations to find that financial-reporting considerations have an effect on tax avoidance similar to the penalties imposed by tax authorities. Overall, the estimated parameters help explain the “undersheltering puzzle.”
Keywords: Tax avoidance; undersheltering; non-tax costs; FIN48; structural estimation
JEL Classification: G14, H21, H25, H26, M41, M48
Suggested Citation: Suggested Citation