Expected Economic Growth and Corporate Tax Planning

This study investigates whether expected economic growth is associated with corporate tax planning. We predict that higher expected economic growth increases the net present value of tax planning opportunities and thus increases investment in tax planning. Consistent with our prediction, we find that one-year ahead cash ETRs are negatively associated with GDP growth forecasts. A series of cross-sectional analyses show this association is more pronounced for firms that are highly cyclical, financially constrained, and more likely to experience a shift in their tax clientele. In supplemental analysis, we find that expected economic growth only influences firms' investment strategies that directly reduce tax expense on the financial statements while current macro-level financial constraints influence firms' investment in strategies that defer cash taxes paid. Our study highlights that growth expectations at the macroeconomic level are an important determinant of time series variation in corporate tax planning.