Is Tax Planning Best Done In Private?

Abstract

We utilize extensive Internal Revenue Service data to investigate the tax behavior of comparable privately-held and publicly-held corporations. Our findings paint a nuanced picture of private versus public firm tax planning. Consistent with prior research, we find that private firms are more willing to engage in tax strategies that also decrease financial accounting income (conforming tax planning). Additionally, we find that private firms are more responsive to shareholder-level dividend taxes. However, tests reveal that private firms engage in either the same or less of other types of tax planning than their public peers. These tests include general measures of nonconforming tax planning and aggressive tax planning, in addition to specific measures such as tax haven usage and use of certain credits and deductions. Overall, our findings suggest that private firms have advantages over their public peers for some types of tax planning, but are not more active tax planners otherwise.