Expected Economic Growth and Investment in Corporate Tax Planning

49 Pages Posted: 7 Mar 2018 Last revised: 31 Dec 2020

See all articles by Jaewoo Kim

Jaewoo Kim

University of Oregon - Department of Accounting

Sean T. McGuire

Texas A&M University - Department of Accounting

Steven Savoy

University of Illinois at Chicago - Department of Accounting

Ryan J. Wilson

University of Iowa - Henry B. Tippie College of Business

Date Written: November 1, 2020

Abstract

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 thus firms’ investment in tax planning will be higher in periods where 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. Utilizing 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 firms 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.

Keywords: Tax planning, Tax Avoidance, GDP Forecast, Economic Growth

JEL Classification: H26, H10, E30

Suggested Citation

Kim, Jaewoo and McGuire, Sean T. and Savoy, Steven and Wilson, Ryan J., Expected Economic Growth and Investment in Corporate Tax Planning (November 1, 2020). Mays Business School Research Paper No. 3132077, Available at SSRN: https://ssrn.com/abstract=3132077 or http://dx.doi.org/10.2139/ssrn.3132077

Jaewoo Kim

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Steven Savoy

University of Illinois at Chicago - Department of Accounting ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States

Ryan J. Wilson (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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