This paper examines how tax uncertainty created by highly aggressive tax planning affects a firm’s investment decisions. The tax uncertainty that we study arises from tax choices of such inadequate merit that the firms themselves believe that they will lose if audited. Consistent with a simple model that we develop, we find that investments in fixed assets and research and development are increasing, at a decreasing rate, in the tax savings from these aggressive plans. This finding is consistent with the tax uncertainty from aggressive tax avoidance dampening investment. We appreciate the excellent research assistance by Kelly Wentland.
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