Exploring the role Delaware plays as a domestic tax haven

We examine whether Delaware is a domestic tax haven. We find that taxes play an economically important role in determining whether U.S. firms locate subsidiaries in Delaware and that a Delaware-based state tax avoidance strategy lowers state effective tax rates by between 0.7 and 1.1 percentage poin...

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Bibliographic Details
Published in:Journal of financial economics 2013-06, Vol.108 (3), p.751-772
Main Authors: Dyreng, Scott D., Lindsey, Bradley P., Thornock, Jacob R.
Format: Article
Language:English
Subjects:
Corporate governance
Corporate tax avoidance
Delaware
Net income
Organizational structure
State government
Studies
Subsidiaries
Subsidiary
Tax avoidance
Tax benefits
Tax haven
Tax havens
Tax rates
U.S.A
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Summary:We examine whether Delaware is a domestic tax haven. We find that taxes play an economically important role in determining whether U.S. firms locate subsidiaries in Delaware and that a Delaware-based state tax avoidance strategy lowers state effective tax rates by between 0.7 and 1.1 percentage points, on average. The tax savings represent a 15–24% decrease in the state income tax burden and translate to an increase in net income of 1.04–1.47%. However, we find that the tax benefits of Delaware tax strategies are diminishing over time in response to initiatives by state governments to limit multistate tax avoidance.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2013.01.004