Macroeconomic Effects of Aggregate Corporate Tax Avoidance: A Cross-Country Analysis

Abstract

We re-examine the relation between corporate taxes and future macroeconomic growth. Prior studies in the economics literature present contradictory evidence on this relation. We argue that the mixed evidence in the prior literature is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax credits, tax exemptions, tax deductions, tax enforcement and firms’ tax planning. Consistent with these concerns, we document that the relation between future economic growth and statutory corporate tax rates are sensitive to choice of economic growth proxies, model specification and control variables. We propose an alternative tax burden measure that aggregate cash effective tax rates of listed firms, a common measure of firm-level tax avoidance, and find a strong and robust positive relation between country-level tax avoidance and future macroeconomic growth. This finding is further supported by a positive relationship between firm-level corporate tax avoidance and future firm-level investment. In cross-sectional tests, the positive relationship between aggregate corporate tax avoidance and future economic growth appears to be driven by countries with higher levels of government corruption and with higher levels of corporate tax planning as opposed to government granted tax incentives.