Does Corporate Tax Avoidance Affect Firm Productivity

This study examines the relation between corporate tax avoidance and firm-level productivity. Using a sample of U.S.-listed firms from 1994 to 2017, we show that, ceteris paribus, greater tax avoidance leads to increased productivity. Consistent with the ''funding gap'' of innovative investments due to debt market frictions, we further provide direct evidence that productivity is more sensitive to tax avoidance when firms exhibit high knowledge capital intensity. Supplemental analysis shows that the productivity effects of tax avoidance are stronger for financially constrained firms. To provide evidence consistent with a causal tax avoidance effect on productivity, we employ a battery of robustness tests, including a quasi-natural research design that exploits a plausibly exogenous increase in certain firms' tax planning opportunities. Our findings extend the ongoing debate on internal capital markets for productivity-enhancing investments, and have policy implications for academics and regulators investigating firm-specific responses to productivity windfalls, such as those that contribute to the aggregate productivity slowdown.