This paper investigates the effect of frictions in consumption taxes on firms' product mix decisions. We use a stacked difference-indifferences approach that exploits the staggered transition from a sales tax with the risk of tax cascading to a value added tax (VAT) with credits on inputs across states in India, as well as detailed data on listed manufacturing firms' production decisions. We find that the switch to a VAT system induces affected firms to narrow their product scope and to reduce vertical integration. That is, firms cut the internal production of input goods and instead focus their production on their best-performing products. Firms affected by the switch to VAT reduce their firm size and are more likely to outsource production of input goods. We also show that this vertical disintegration results in lower manufacturing costs, higher profitability and firm value, and increased investment efficiency for affected firms. Overall, the paper shows that alleviating frictions in sales tax or VAT systems can reduce investment and productivity distortions and improve the allocation of capital across firms.

Regulators are increasingly considering and mandating additional public tax disclosures to enhance transparency and promote scrutiny of corporate tax avoidance. We conducted three experiments to examine how such disclosures influence retail investors' perceptions of firms with identical effective tax rates but different tax avoidance methods. In the first experiment, participants evaluated whether firms were paying their fair share of taxes. We find that additional public tax disclosures reduce retail investors' tendency to differentiate between tax avoidance methods, subsequently affecting their willingness to invest. Specifically, participants use easy‐to‐process summary tax information in the additional public tax disclosure as a heuristic shortcut. The second and third experiments demonstrate that modifying the disclosure format and prompting participants to assess tax aggressiveness rather than fairness can mitigate these adverse effects. However, none of the cases significantly alters participants' perceptions compared to the baseline condition of no public tax disclosure. Overall, our findings provide insights into the design of, and the debate surrounding, additional public tax disclosures.

Policymakers claim that combating tax avoidance can help reduce industry concentration by leveling the playing field between industry leaders and their competitors. We test the validity of this claim by using administrative data on industry concentration and exploiting the staggered introduction of anti-tax avoidance regulations across 17 European countries. Although these regulations significantly reduce tax avoidance, we find no statistically or economically meaningful effect on industry concentration. Further tests indicate that our nonresults stem from a genuine lack of effect rather than a lack of statistical power and that our inferences are robust to multiple research designs. The sole exception is in industries with both high levels of leader tax-avoidance advantages and multinational presence, but even in these industries, effect sizes are modest and fall short of regulatory benchmarks. Overall, our findings cast doubt on the idea that broad-based anti-tax avoidance regulations can materially influence industry concentration.