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Pandemic and tax avoidance: Cross-country evidence

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  • Zhu, Jun
  • Ho, Kung-Cheng
  • Luo, Sijia
  • Peng, Langchuan

Abstract

Tax avoidance is appealing to firms since it increases their cash flow by reducing tax payments, which can then be used to expand operations and invest in research and development. The existing literature explores numerous factors that contribute to firms' tax avoidance behavior, but it fails to consider the impact of a pandemic. Based on a sample of 42 countries between 1989 and 2020, we investigate the relationship between pandemic presence and firms’ tax avoidance activities. We find that tax avoidance activities increase during pandemics, which is reflected in decreased effective tax rates (ETRs). Furthermore, this influence is strengthened by adopting International Financial Reporting Standards and societal trust level. Channel analysis shows that the findings are realized through worse firm performances, reduced economic growth, lower country-level stability, and more interest obligations. These findings offer up-to-date perspectives and recommendations to policymakers in crafting suitable and effective schemes for post-pandemic recovery.

Suggested Citation

  • Zhu, Jun & Ho, Kung-Cheng & Luo, Sijia & Peng, Langchuan, 2023. "Pandemic and tax avoidance: Cross-country evidence," Economic Modelling, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:ecmode:v:124:y:2023:i:c:s0264999323001128
    DOI: 10.1016/j.econmod.2023.106300
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    More about this item

    Keywords

    Pandemic; Tax avoidance; Formal institution; Informal institution;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General

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