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Tax avoidance in French Firms: Evidence from the Introduction of a Tax Notch

Author

Listed:
  • A. BAUER

    (Insee)

  • M. ROTEMBERG

    (New York University)

Abstract

Corporate tax codes can have notches; values where after-tax profits decrease in before-tax sales. Firms endogenously respond to notches, leading to excess mass in the firm-size distribution. We study a 1997 policy reform in which the French government implemented a transient tax reform that increased profit taxes by 15% for firms with over 50 million Francs in turnover. We use two distinct and complementary approaches to estimate the extent of tax avoidance: (a) using firms far away from (and therefore unlikely to be responsive to) the tax notch in the same year and (b) the entire firm size distribution before the tax reform. Both strategies generate similar results for the extent of tax avoidance. We show that the firms who avoid the tax are the ones with the lowest calibrated adjustment costs and those with the larger profits. The tax avoidance behavior comes mostly from increases in inventories and decreases in sales.

Suggested Citation

  • A. Bauer & M. Rotemberg, 2020. "Tax avoidance in French Firms: Evidence from the Introduction of a Tax Notch," Documents de Travail de l'Insee - INSEE Working Papers g2020-10, Institut National de la Statistique et des Etudes Economiques.
    • Handle: RePEc:nse:doctra:g2020-10
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    File URL: https://www.bnsp.insee.fr/ark:/12148/bc6p06zrk46/f1.pdf
    File Function: Document de travail de la DESE numéro G2020/10
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    More about this item

    Keywords

    Business Taxes; Tax Evasion; Firm Production;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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