Languages and corporate tax avoidance

Abstract

This paper examines the effect of languages on corporate tax avoidance. We hypothesize and find that managers of firms in countries with languages that grammatically distinguish the future from the present (languages with a strong future time reference or FTR) perceive the potential future tax repayments and penalties to be more distant and therefore engage in more tax avoidance. Further tests exploiting the variation in language FTR within Switzerland and Belgium, which have different official languages in different regions but a single tax system, suggest that our findings are not driven by country-level differences in the tax system. We also provide evidence that U.S. firms with CEOs born in countries with strong FTR languages avoid more taxes than those with CEOs born in weak FTR countries, indicating that it is the CEO’s native tongue that affects tax avoidance. Collectively, our findings highlight the importance of social norms in understanding corporate tax strategies.