The geography of corporate tax avoidance

We empirically examine the relation between firms’ headquarters location and their level of tax avoidance. Employing multiple measures of tax avoidance, we consistently find significant location fixed effects on firms’ tax behaviour across different geographic areas in the US, after controlling for firm fixed effects, time-varying firm characteristics and state income tax rates. Additional analyses show that location fixed effects are more pronounced for firms that have been located in an area for a longer period and that have lower geographic diversification. We then explore a range of regional characteristics as determinants of location fixed effects and find some evidence that location-specific resources and risks factors, but not cultural factors, are associated with time-invariant differences in corporate tax avoidance across regions. Our study has important practical implications for tax authorities, suggesting that tax enforcement, education, and inspections should be tailored to take account of firms’ geographical location.