Legal institutions and tax avoidance

This dissertation investigates how legal institutions influence corporate tax avoidance, contributing to a growing body of literature that recognizes the regulatory environment as a key determinant of firms’ tax strategies. It addresses the question of how non-tax laws—particularly labor laws and creditor rights—interact with tax legislation to shape firms' tax behavior across different institutional contexts. The thesis is structured into three empirical chapters, each focusing on a different set of legal rules: Chapter 2 examines the relationship between employment protection legislation (EPL) and tax avoidance across 24 OECD countries over the period 1985–2014. The study argues that stricter labor laws increase firms’ capital intensity, which broadens the tax base due to the partial deductibility of capital compared to labor. Using difference-in-differences methods, it finds that stronger EPL leads to significantly higher levels of tax avoidance, especially in labor-intensive firms and industries. Chapter 3 explores how creditor rights and their enforcement affect tax avoidance by analyzing bankruptcy reforms in 27 countries between 1993 and 2014. The paper identifies two competing mechanisms: stronger creditor rights could reduce tax avoidance through increased monitoring and lower moral hazard, or increase it through enhanced debt capacity, which acts as a tax shield. The findings suggest the latter mechanism dominates—firms in strong enforcement regimes engage in less tax avoidance because they rely more on debt financing. Chapter 4 evaluates the effectiveness of corporate tax reforms in the EU—specifically, those affecting both tax rates and tax bases—in curbing profit shifting. It constructs a novel index of tax base breadth and finds that reforms which broaden the tax base and introduce anti-avoidance measures significantly reduce profit shifting by multinational firms. This indicates that tax base reforms, not just rate reductions, are crucial in combating aggressive tax planning. Collectively, the dissertation demonstrates that labor law, creditor rights, and corporate tax policy are deeply intertwined in shaping tax avoidance behaviors. The results highlight the importance of considering institutional complementarities when designing tax policy. The findings provide new insights for policymakers on how non-tax legal frameworks can either constrain or facilitate tax planning strategies, and they underscore the need for a holistic approach to tax compliance and regulatory reform.