Do competitive markets encourage tax aggressiveness?☆

We investigate whether industry-level product market competition and firm-level market leadership affect firms' tax aggressiveness. Studying competition from both current market participants and potential entrants, and using a market share-based measure of market leadership, we find that firms facing higher competition from current market participants engage in more tax aggressiveness. We further find that market-following firms - rather than market-leading firms - engage in relatively more tax aggressiveness within these higher competition settings. Our results contrast with most political and regulatory anecdotes that target market-leading firms for aggressive tax behaviors, and add to the ongoing policy debates on tax incidence. Our main findings and additional tests are consistent with the view that market-leading firms in imperfectively competitive product markets are able to pass on tax costs to customers, while market-following firms in crowded industries are pressured to engage in tax aggressiveness because they cannot pass on tax costs.