Expected economic growth and investment in corporate tax planning

This study investigates whether expected economic growth is associated with investment in corporate tax planning. We predict that higher expected economic growth increases the net present value of tax planning opportunities and that thus firms’ investment in tax planning will be higher in periods when expectations about economic growth are optimistic. Consistent with expectations, we find that changes in fees for auditor-provided tax services are positively associated with GDP growth forecasts after controlling for known determinants of tax avoidance. Using path analysis, we find that expected macroeconomic growth influences firms’ investment in tax planning directly, rather than indirectly through other investments. Cross-sectional analyses show this association is more pronounced for firms that are financially constrained and those that are more likely to experience a change in tax status. Our study highlights that growth expectations at the macroeconomic level are an important determinant of time-series variation in firm’s investment in corporate tax planning.