Do better entrepreneurs avoid more taxes?

In this paper, we estimate why some firms strongly react to avoidance incentives given by nonlinear taxes and regulations while others don¡¯t. We measure avoidance using a kinkpoint in the French corporate income tax schedule and a notch in exposure to French labor regulation. We find that firm profitability is a strong predictor of avoidance: income tax elasticities are 30% bigger among firms in the top quintile of ROA than among firms in the bottom quintile; employment declines induced by the regulation notch are more than twice as big among the former group of firms as among the latter. Going further, we find that tax elasticities reflect in great part the speed of tax code learning by firms and that more profitable firms learn faster. We also find that firms¡¯ avoidance strategies are much more developed when management is more sophisticated and ownership structures are more concentrated. Overall, we conclude that a large part of firm heterogeneity in the strength of reaction to taxes and regulations reflects differences in the quality of governance rather than differences in firm technologies.