A Re-examination of Firm Size and Taxes

We document that larger firms pay substantially lower cash effective tax rates (cash ETRs) in the long-term than do smaller firms. This pattern in long-term cash ETRs is robust to various specifications, but vanishes when cash ETRs are measured over a single year. Over a ten-year period, firms in the largest decile pay 10.8 p.p. (26 percent) lower taxes than those in the smallest decile, while this gap balloons to 14.4 p.p. (35 percent) for the largest 1 percent of firms. The relation between firm size and taxes over the long run cannot be explained by foreign operations, asset tangibility, R&D spending, capital structure, net operating loss carryforwards, or releases in the valuation allowance. While profitability explains near a quarter of this effect, about 80 percent of the association between size and taxes can be explained by the magnitude of losses within the horizon period. Overall, our results suggest large firms pay fewer taxes over the long run primarily by avoiding losses, potentially mitigating the negative consequences of tax convexity.