Why do not all firms engage in tax avoidance?

  • Martin JacobEmail author
  • Anna Rohlfing-Bastian
  • Kai Sandner
Original Paper


Empirical evidence suggests that there is substantial cross-firm variation in tax avoidance. However, this variation is not well understood. This paper provides a theoretical background for testing, and thus explaining, cross-firm differences in tax avoidance. We develop a formal model with two agents to analyze the incentives that lead firms to engage in tax avoidance. The tax avoidance decision is a function of moral hazard, tax-planning costs, and the potential to increase earnings. If the potential to increase earnings is low, the tax-planning decision is determined by moral hazard problems. In contrast, when this potential is high, the tax-planning decision is mainly driven by tax-planning costs, such as reputational and political costs. One implication of our model is that moral hazard can (partly) explain why some firms do not engage in tax avoidance: Severe problems of moral hazard make tax avoidance less likely. Our model can be a basis for testing differences in tax avoidance between different types of firms.


Moral hazard Tax avoidance Tax planning 

JEL Classification

D21 H26 H32 



We thank Ralf Ewert (the editor), two anonymous reviewers, Kay Blaufus, John Christensen, Markus Grottke (discussant), Jochen Hundsdoerfer, Daniela Lorenz, Maximilian Müller, Rainer Niemann, Martin Ruf, Harm Schütt, Caren Sureth, Antonio de Vito, participants of the EAA Annual Congress 2016 in Maastricht, the VHB Annual Congress 2016 in Munich, the 2014 GEABA conference in Regensburg, and seminar participants at the WHU - Otto Beisheim School of Management, the University of Bayreuth, and the University of Paderborn for helpful comments and suggestions. Anna Rohlfing-Bastian and Martin Jacob acknowledge financial support by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation)—Project-ID 403041268—TRR 266.


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  • Martin Jacob
    • 1
    Email author
  • Anna Rohlfing-Bastian
    • 2
  • Kai Sandner
    • 3
  1. 1.WHU - Otto Beisheim School of ManagementVallendarGermany
  2. 2.Goethe-University FrankfurtFrankfurt am MainGermany
  3. 3.Catholic University of Eichstätt-IngolstadtIngolstadtGermany

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