Investments in Tax Planning, Tax Avoidance and the New Economy Business Model

Abstract

Research in economics, finance, and management describes a new type of firm and a new way of doing business — the "new economy business model" — that has been reshaping the U.S. economy since at least the mid 1980’s. We extend this research and develop a composite measure of this model, validate it using predictions established in prior research, and investigate the use of the new economy business model among firms of various maturities and industries. We then use our measure to examine the relation between the new economy business model, tax avoidance and investments in tax planning. We provide evidence that use of the new economy business model is increasing over time and is associated with lower corporate tax rates. The results also suggest that new economy business model firms invest in significantly less tax planning and that features of new economy business model firms potentially allow them to achieve greater tax savings with relatively lower investments in tax planning. We conclude that use of the new economy business model allows firms to exploit their operational flexibility (domestically and internationally) to align with available tax incentives such that they are able to achieve relatively greater tax savings in spite of lower investments in tax planning.

Keywords: New Economy, Tax Avoidance, Economic Trends, Investments in Tax Planning

JEL Classification: H25, H26, M41