Essays on Corporate Income Taxation and Firm Behavior

Abstract

This dissertation consists of three contributions to the literature on corporate income taxation. More precisely, it analyzes jurisdictions’ optimal tax policies when firms have an incentive to reduce their tax payments either by legal tax avoidance or illegal tax evasion. The dissertation highlights the importance of social norms and institutional quality in this context. Depending on the circumstances under which tax collection takes place, jurisdictions’ optimal tax-setting behavior can take very different forms. This finding is derived by investigating the interdependencies between social values, institutional quality, corporate income taxation, and firm behavior from different perspectives. Taking a within-firm view on the topic, the first paper focuses on the tax avoidance decision of a single firm and the associated effect on the latter's employees. The paper suggests a negative relationship between a firm's tax-planning activities and workers’ effort and, thus, sheds light on a potential link between corporate tax avoidance and firm performance that has not been analyzed so far. The second and third paper shift the focus towards the role of the government and model countries’ optimal tax-setting behavior in a framework where bureaucratic corruption and weak institutions may allow firms to evade taxes on corporate income. The second paper shows how differences across countries, especially regarding corruption, institutional quality, and location-specific rents, may lead to different, and possibly even opposing, tax policies. In particular, the paper predicts a country to either (i) ignore, (ii) combat, or (iii) tolerate tax evasion. Finally, the third paper analyzes the effect of firms' tax evasion incentives on tax competition between countries. It is shown that a country tends to set a rather low tax rate and, thus, be aggressive in tax competition if firms operating in that country have a strong incentive to evade taxes. This “evasion effect” has not been investigated by previous literature on tax competition.