DP15060 Corporate tax avoidance and industry concentration

Author(s): Julien Martin, Mathieu Parenti, Farid Toubal
Publication Date: July 2021
Date Revised: July 2021
Keyword(s): industry concentration, IRS Audit Probability, Tax avoidance
JEL(s): D22, D4, F23, H26, L11
Programme Areas: Public Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15060

This paper investigates the influence of corporate tax avoidance (CTA) on industry concentration in the U.S. since the mid-1990s. A simple model shows CTA increases concentration if (i) CTA gives a competitive advantage to avoiding firms, and (ii) CTA of large relative to small firms increases. We find a positive and causal impact of CTA on firm-level sales using three alternative identification strategies. We then show CTA increases more among the largest firms in most industries, which reinforces their dominant position. In key industries, the differences in tax aggressiveness between large and small firms explain 10% to 30% of the increase in concentration over the last 25 years. CTA-induced changes in the CR4 index influence industrial real output to an extent that is relevant at the macroeconomic scale.