Tax avoidance in French Firms: Evidence from the Introduction of a Tax Notch

A. Bauer and M. Rotemberg
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A. Bauer: Insee
M. Rotemberg: New York University

Documents de Travail de l'Insee - INSEE Working Papers from Institut National de la Statistique et des Etudes Economiques

Abstract: Corporate tax codes can have notches; values where after-tax profits decrease in before-tax sales. Firms endogenously respond to notches, leading to excess mass in the firm-size distribution. We study a 1997 policy reform in which the French government implemented a transient tax reform that increased profit taxes by 15% for firms with over 50 million Francs in turnover. We use two distinct and complementary approaches to estimate the extent of tax avoidance: (a) using firms far away from (and therefore unlikely to be responsive to) the tax notch in the same year and (b) the entire firm size distribution before the tax reform. Both strategies generate similar results for the extent of tax avoidance. We show that the firms who avoid the tax are the ones with the lowest calibrated adjustment costs and those with the larger profits. The tax avoidance behavior comes mostly from increases in inventories and decreases in sales.

Keywords: Business Taxes; Tax Evasion; Firm Production (search for similar items in EconPapers)
JEL-codes: D24 H25 H26 H32 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cfn, nep-cwa, nep-iue and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:nse:doctra:g2020-10

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