How do Firms Respond to a Non-Income Tax? The Interplay between Non-Income Taxes and Income Tax Avoidance

Abstract

The Medical Device Excise Tax (MDET) enacted a 2.3 percent tax on domestic sales of certain medical devices. Medical device firms suggested the tax would reduce profitability, leading to cuts in employees, research and development, and capital expenditures. However, we find that medical device firms engaged in more income tax avoidance in response to the MDET. Furthermore, medical device firms with high income tax avoidance made no significant cuts to investment spending or employees, whereas firms with low income tax avoidance significantly decreased investment spending and employees. Our findings suggest that some medical device firms used income tax avoidance as a substitute for reducing investment spending. Our results serve to inform both researchers and policymakers regarding the interplay between non-income taxes and income tax avoidance.