Terror and Tax

• In Event: Tax, Loss, and Uncertainty

Abstract

We examine the impact of terrorism on corporate tax avoidance in the U.S.. We find that firms headquartered in states with more terrorist incidents engage more in corporate tax avoidance. A difference-in-differences estimation with staggered introduced terrorist attacks or with September 11, 2001 terrorist attack as a single event yields similar patterns. Confirming a tax effect of terrorism, we show that terrorism has a greater effect on corporate tax avoidance when terrorist attacks are more on business facilities, use more powerful weapons, or cause more casualties. Tests on channels show that terrorism leads firms to become more financially constrained and causes the U.S. government to shift Internal Revenue Service resources away from corporate tax audits and towards terrorism prevention activities. We conclude that terrorism creates a business environment that increases and facilitates corporate demand for tax savings.

Authors

• Xinjiao Guan, National University of Singapore

• Zhen Li, National University of Singapore

• William J Moser, Miami University

• Haoran Xu, Renmin University of China