Does Corporate Tax Planning Affect Firm Productivity?

We examine the relation between corporate tax planning and firm-level productivity. Using a sample of U.S. public firms from 1993 to 2017, we find that tax planning is positively associated with productivity. Our findings further indicate that tax planning contributes to growth in production input factors — capital and labor. We also test the underlying mechanisms, documenting that the observed association between productivity and tax planning is more pronounced in financially constrained and knowledge capital-intensive firms. We exploit the initiation of new banking relationships and the introduction of Check-the-Box regulations as sources of tax planning variation to facilitate Difference-in-Differences analyses. The empirical evidence holds consistently across a wide array of robustness tests. Taken together, the results enhance the understanding on the economic implications of tax planning and provide insights for informed tax policy debates.