Zero-Tax Firms

Abstract

We study profitable firms with no tax expenses. We find that the proportion of profitable firms that owe zero taxes (zero-tax firms) has increased substantially over the past 70 years, accounting for almost 15% of listed U.S. firms in recent years. Zero-tax firms thus represent a major group of tax avoiders. However, we find that zero-tax firms avoid taxes using nonaggressive means: loss-related deductions and nontaxable income are important factors, whereas international tax avoidance plays a minor role. This paper further demonstrates that the large share of zero-tax firms can potentially drive results and affect inferences in tax avoidance studies. Taken together, we show that zero-tax firms are a unique and important subset of tax avoiders.