How Costly Is Tax Avoidance? Evidence from Structural Estimation

62 Pages Posted: 16 May 2019 Last revised: 23 Jul 2020

See all articles by Charles McClure

Charles McClure

University of Chicago Booth School of Business

Date Written: July 17, 2020


I develop a structural model to quantify the costs of tax avoidance. In the model, the firm trades off tax savings with tax-audit risk, financial-reporting benefits, and non-tax costs (which affect pre-tax income). The comparative statics suggest tax avoidance is path-dependent, which can help resolve the unexplained persistent differences across firms. The estimated parameters suggest non-tax costs, which are difficult to observe, decrease pre-tax earnings by 7.8%. The large magnitude of this estimate can explain why firms appear to under-utilize tax-avoidance strategies. When I estimate the model on different subsamples, I find larger firms engage in more tax avoidance primarily because they can better identify lower-risk opportunities. I find multinationals have lower-risk opportunities to avoid taxes but incur more non-tax costs relative to domestic firms, which helps to explain similar levels of tax avoidance. Overall, the estimated parameters help to explain the “undersheltering puzzle” and the cross-sectional variation in tax avoidance.

Keywords: Tax avoidance; undersheltering; non-tax costs; FIN48; structural estimation

JEL Classification: G14, H21, H25, H26, M41, M48

Suggested Citation

McClure, Charles, How Costly Is Tax Avoidance? Evidence from Structural Estimation (July 17, 2020). Chicago Booth Research Paper No. 19-14, Fama-Miller Working Paper, Available at SSRN: or

Charles McClure (Contact Author)

University of Chicago Booth School of Business ( email )

7737024885 (Phone)

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