Tax Policy Uncertainty and Corporate Tax Strategies

ABSTRACT This paper examines how firm‐level exposure to tax policy uncertainty affects corporate tax avoidance. Using US public firms from 2002 to 2020, we measure exposure with the tax policy risk (TPR) index of Hassan et al., which captures the share of quarterly earnings‐call discussion devoted to risks surrounding tax policy. Firms with greater exposure to tax policy uncertainty exhibit lower effective tax rates: a one‐standard‐deviation increase in TPR raises tax avoidance by 2%–3% relative to the sample mean, and the relationship survives instrumental‐variable estimation, propensity score matching, and lead‐lag tests. Consistent with real options reasoning, in which uncertainty about domestic tax policy raises the value of relocating income to less exposed jurisdictions, high‐TPR firms shift more income abroad and operate more tax‐haven subsidiaries. The response is concentrated among financially flexible firms, firms with earnings‐management expertise, and firms with market power, and shareholders value tax avoidance more highly when tax policy uncertainty is high. Our findings identify tax policy uncertainty as a distinct driver of corporate tax strategies.