How Costly is Tax Avoidance? Evidence from Structural Estimation

ABSTRACT I develop a structural model to quantify the costs of tax avoidance. In model, firm trades off savings with audit risk, financial reporting considerations, and operational frictions imposed by avoidance, last which label as nontax costs. The estimated parameters suggest costs, are difficult observe, decrease pretax income 6.4 percent or $58 million per firm-year. large magnitude this estimate can explain why firms appear underutilize avoidance strategies. Through counterfactual analysis, effect risk considerations find that have an on similar penalties authorities. Overall, help “undersheltering puzzle.” JEL Classifications: G14; H21; H25; H26; M41; M48.