Determinants of Tax Avoidance

I model the determinants of corporate tax avoidance. Prior research hypothesizes that firms forgo profitable tax-saving strategies due to non-tax costs, financial reporting incentives, and tax authority scrutiny. Because many of these frictions are not directly observable, I quantify their effects using a dynamic structural model in which the firm chooses a set of tax-saving projects in each period in order to maximize share price. I find that average non-tax costs decrease pre-tax earnings by 14.7%. Existing tax risk disclosures decrease tax avoidance by 6.9% but only capture 63% of the expected repayment amount under the audit assumptions specified in the disclosure. The cross-sectional dispersion in effective tax rates primarily arises from differences in the ability to avoid taxes rather than differences in non-tax costs. Finally, I also consider the impact of hypothetical reporting requirements on firms’ decisions to avoid taxes. 1I am grateful for the support of my dissertation committee, David Larcker (chair), Lisa De Simone, Wesley Hartmann, and Peter Reiss. I thank Anne Beyer, Elizabeth Blankespoor, Rebecca Lester, and participants of the 2017 CMU Mini Conference and Stanford Accounting Workshop for helpful suggestions. I have also benefited greatly from Lil Mills, Bridget Stomberg, and several tax directors for providing institutional insight. Finally, I thank my fellow PhD students for their encouragement and support. All errors are my own.