Private Equity and Taxes

Abstract

We study corporate tax avoidance as a new dark side of private equity buyouts for domestic governments. Exploiting over 10,000 deals and private firm data in Europe, we document that target firms' effective tax rates decrease by 13% after the transaction. Those targets engaging in significant post-deal tax avoidance exhibit lower asset, employment, and productivity growth, but have higher payout ratios. Further tests show that buyouts induce more profit shifting and higher leverage, which erodes tax bases in high-tax countries. Collectively, our findings suggest that private equity can have negative externalities for governments as tax savings accrue to global shareholders.