There exists a competitive "tax advice" industry supplying tax avoidance schemes which help taxpayers reduce their tax liabilities. In recent years, these "tax advice" firms have targeted the middle (rather than the top) of the income distribution, leading to a significant impact on tax revenue.
Chapter 2 develops a model that includes both demand- and supply-side considerations. Firms offer a common type of avoidance scheme in a form of two-part pricing, where a taxpayer must pay at least a minimum fee, and if the taxpayer can afford it, the avoidance scheme could be purchased at a price per unit. Legal challenges by the tax authority are taken into account to capture the taxpayer's avoidance decisions. It is found that there is an endogenous threshold income below which taxpayers do not avoid, and above which they avoid maximally, and that avoidance may drive a Laffer relationship between tax rates and tax revenue.
Chapter 3 assumes that the "tax advice" firms provide differentiated products rather than the single type of avoidance scheme assumed in Chapter 2 so that the taxpayer can diversify the risk that any one scheme is declared illegal. By using the portfolio selection method proposed by Markowitz (1952), this chapter compares the avoidance demand of the taxpayer and the supply and pricing strategies of firms, in monopoly and duopoly markets. The results indicate that both duopoly market structure and endogenous adjustments in the price of avoidance reduce the effectiveness of anti-avoidance activities by the tax authority. Additionally, the endogenous per-unit price of avoided tax in a duopoly market is higher than in a monopoly market, as the taxpayer can spread the risk of being caught through two firms in the duopoly market. These findings suggest that, beyond legal enforcement, new approaches to anti-avoidance may be needed, such as a broader regulatory approach to raising promoter’s costs of doing business.
Chapter 4 focuses on corporate tax avoidance and examines the effect of tax avoidance on firm value by using a large sample of Chinese A-share listed firms over the period from 2008 to 2020. The regression results show that there is a significantly positive relation between tax avoidance and firm value, and that the effect is conditional on corporate governance quality. The results are robust to the use of alternative tax avoidance measures and alternative estimation techniques. Heterogeneity analysis reveals that the conditionality on corporate governance quality is mostly driven by non-state-owned enterprises and younger firms. Moreover, the effect of tax avoidance on firm value by corporate governance is stronger for big companies than for small companies.
