Thursday, January 20, 2011
We examine how corporate tax avoidance incentives play an incremental role in explaining why firms organize subsidiaries in the state of Delaware. We also quantify the extent to which Delaware-based subsidiaries reduce corporate effective tax rates. Findings suggest that firms are more likely to have subsidiaries in Delaware if they also have subsidiaries in other states with tax rules conducive to a common tax avoidance strategy involving Delaware corporations. This empirical result suggests that taxes influence the decision to organize subsidiaries in Delaware incremental to legal and or governance factors. In addition, the tax benefits of incorporating and operating subsidiaries in the state of Delaware are economically meaningful. For a typical firm, we document a reduction in the state effective tax rate of approximately two percentage points. This represents a reduction in state taxes of nearly 50% of the average state effective tax rate of 4.6%.