Literature Review Undergraduate 954 words

Tax Avoidance and Firm Growth: Is There a Link?

~5 min read 4 sections Taxes · Taxation

Abstract

This paper examines the relationship between corporate tax avoidance and firm growth, surveying academic literature and real-world examples to assess whether a meaningful correlation exists. Drawing on studies by Desai, Foley, and Hines, as well as Desai and Dharmapala, the paper finds that the evidence is mixed: tax avoidance can support growth under certain conditions but may also produce negative returns or reputational damage. Case studies involving Burger King, McDonald's, and various Pennsylvania firms illustrate how firm size, structure, and the specific tax mechanisms employed all influence outcomes. The paper concludes that tax avoidance tends to align with growth only when wielded strategically by well-governed firms.

Key Takeaways

Introduction: The Tax Avoidance–Growth Question: Conditional link between tax avoidance and firm growth
Firm Structure and Tax Avoidance Strategies: How REITs, capital gains, and production loopholes affect growth
Corporate Case Studies: Burger King and McDonald's: Real-world examples of tax avoidance strategies and their outcomes
Macro Trends, Reputational Risks, and Conclusions: Macro stagnation, reputational costs, and the conditional verdict

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What makes this paper effective

Immediately establishes the conditional nature of the answer — "yes, but only under certain conditions" — giving the review a clear, nuanced thesis rather than a binary claim.
Moves logically from abstract academic evidence to concrete corporate examples (Burger King, McDonald's), grounding theoretical claims in observable business behavior.
Acknowledges counterarguments (negative abnormal returns, reputational costs, macro-level stagnation) rather than presenting tax avoidance as uniformly beneficial, which strengthens credibility.

Key academic technique demonstrated

The paper demonstrates effective synthesis of conflicting literature. Rather than selecting only evidence that supports one position, it presents competing findings — Desai, Foley and Hines on the growth benefits of tax havens versus Desai and Dharmapala on negative abnormal returns — and uses those tensions to frame its conditional conclusion. This technique is characteristic of a strong literature review: mapping the debate before rendering a qualified verdict.

Structure breakdown

The paper opens with a literature-grounded thesis paragraph, then moves through three analytical layers: investment-type and firm-structure factors, real-world corporate cases, and macro-level observations with a closing verdict. Each layer adds a new dimension (theoretical, empirical, systemic) to the central question, producing a short but logically layered argument rather than a list of loosely connected points.

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Essay 954 words

Introduction: The Tax Avoidance–Growth Question

What follows is a review of whether there is a correlation between corporate tax avoidance and firm growth. Looking at the literature reveals that the evidence is mixed, but that the overall answer is a conditional "yes" — there can indeed be a link between tax avoidance and firm growth. To explain the conditional nature of this answer, one can look to the work of Desai, Foley, and Hines (2006), who assert that "firms with sizable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens" (Desai, Foley & Hines, 2006). They further state that "one percent greater sales and investment growth in nearby non-haven countries is associated with a 1.5 to 2% greater likelihood of establishing a tax haven operation" (Desai, Foley & Hines, 2006).

An alternative viewpoint offered by Desai and Dharmapala holds that high levels of tax avoidance combined with large book-tax gaps lead to subsequent "negative abnormal returns" on investment (Desai & Dharmapala, 2006). This tension between the two positions establishes the conditional framework through which the remainder of the evidence must be evaluated.

Firm Structure and Tax Avoidance Strategies

The type of investments and business structures of a firm play a significant part in whether tax avoidance correlates with growth. For example, investors in certain types of real estate investment trusts (REITs) are able to pay no corporate income taxes on those investments, so long as a substantial majority of the profits are paid out to investors. This fact alone would correlate to higher growth than if the REIT tax write-off were not present (Fisher, 2002).

In that same vein, many firms make use of investments and tax shelters that are taxed at the lower capital gains rate rather than at corporate income rates, producing an automatic net gain in profits and growth in many cases (O'Neill, 2012). A similar example showing that at least some forms of tax avoidance benefit certain types of firms involves tax loopholes for domestic production activities. Firms that make use of those loopholes often realize very promising corporate growth rates in terms of profits, employee headcount, and overall revenues (Coy, 2012).

2 Sections Hidden · 325 words

Corporate Case Studies: Burger King and McDonald's215 words

Another example, albeit limited, where a firm can grow itself and reduce its taxes at the same time is what Burger King was widely criticized for attempting in 2014. It was reported that the company would merge with a Canadian…

Macro Trends, Reputational Risks, and Conclusions110 words

At a macro level, one can observe that tax loopholes are used excessively across the broader corporate landscape, yet overall economic growth in the private sector is flailing (Chang, 2012). What actually occurs at the micro level — with specific firms…

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References

Chang, S. (2012). The great debt controversy in the U.S. and beyond. SERI Quarterly, 5(2), 50–62.

Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145–179. doi:10.1016/j.jfineco.2005.02.002

Desai, M. A., Foley, C. F., & Hines, J. R. (2006). The demand for tax haven operations. Journal of Public Economics, 90(3), 513–531. doi:10.1016/j.jpubeco.2005.04.004

Fisher, D. (2002). Pipeline for profits. Forbes, 169(6), 188–190.

Gallemore, J., Maydew, E. L., & Thornock, J. R. (2014). The reputational costs of tax avoidance. Contemporary Accounting Research, 31(4), 1103–1133. doi:10.1111/1911-3846.12055

Lisowsky, P. (2010). Seeking shelter: Empirically modeling tax shelters using financial statement information. Accounting Review, 85(5), 1693–1720. doi:10.2308/accr.2010.85.5.1693

O'Neill, J. (2012). Innovation and constraints on tax shelters. Faulkner Law Review, 4(1), 225–263.

Sage, A., & Ralph, A. (2014). McDonald's denies tax avoidance claims. The Times (United Kingdom), 40.

Schaefer, S. (2014). Corporate America's hunt for lower taxes won't end with Burger King and Tim Horton's. Forbes.com, 1.

Scott, J. (2012). Tax reforms could level playing field for Pa. businesses. Central Penn Business Journal, 28(9), 1.

Wilson, R. J. (2009). An examination of corporate tax shelter participants. Accounting Review, 84(3), 969–999.

Key Concepts in This Paper

Tax Avoidance Firm Growth Tax Havens Corporate Structure Book-Tax Gap Capital Gains Shelters REIT Tax Benefits Reputational Risk Multinational Tax Strategy Well-Governed Firms