Why do not all firms engage in tax avoidance?

Martin Jacob (), Anna Rohlfing-Bastian () and Kai Sandner ()
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Martin Jacob: WHU - Otto Beisheim School of Management
Anna Rohlfing-Bastian: Goethe-University Frankfurt
Kai Sandner: Catholic University of Eichstätt-Ingolstadt

Review of Managerial Science, 2021, vol. 15, issue 2, No 11, 459-495

Abstract: Abstract Empirical evidence suggests that there is substantial cross-firm variation in tax avoidance. However, this variation is not well understood. This paper provides a theoretical background for testing, and thus explaining, cross-firm differences in tax avoidance. We develop a formal model with two agents to analyze the incentives that lead firms to engage in tax avoidance. The tax avoidance decision is a function of moral hazard, tax-planning costs, and the potential to increase earnings. If the potential to increase earnings is low, the tax-planning decision is determined by moral hazard problems. In contrast, when this potential is high, the tax-planning decision is mainly driven by tax-planning costs, such as reputational and political costs. One implication of our model is that moral hazard can (partly) explain why some firms do not engage in tax avoidance: Severe problems of moral hazard make tax avoidance less likely. Our model can be a basis for testing differences in tax avoidance between different types of firms.

Keywords: Moral hazard; Tax avoidance; Tax planning (search for similar items in EconPapers)
JEL-codes: D21 H26 H32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11846-019-00346-3

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