Debt and Taxes: The Role of Tax Avoidance
Abstract
Abstract Empirically, the effect of corporate tax rates on leverage has been smaller than expected based on trade-off theory. In this article, I show that tax avoidance functions as a non-debt tax shield, reducing the benefits of the debt tax shield. I find that higher tax rates cause higher non-debt tax avoidance, which crowds out the debt tax shield. Moreover, I show that the strength of the relationship between debt and tax rates depends on the level of tax avoidance. A 1-standard-deviation higher tax rate implies 2.8% higher leverage for low tax avoidance firms, but has a negative effect for high tax avoidance firms.
Fields of Study & Subjects
Corporate Taxation and Avoidance
Corporate Finance and Governance
Taxation and Legal Issues
Publication details
- Journal / source
- Journal of Financial and Quantitative Analysis
- Volume
- 61
- Issue
- 4
- Pages
- 2007–2032
- Publication date
- 13 January 2026
- Language
- EN