We examine whether variation in the separation of ownership and control influences the tax practices of private firms with different ownership structures. Fama and Jensen (1983) assert that when equity ownership and corporate decision-making are concentrated in just a small number of decision-makers, these owner-managers will likely be more risk averse and thus less willing to invest in risky projects. Because tax avoidance is a risky activity that can impose significant costs on a firm, we predict that firms with greater concentrations of ownership and control, and thus more risk averse managers, avoid less income tax than firms with less concentrated ownership and control. Our results are consistent with these expectations. However, we also consider a competing explanation for these findings. In particular, we examine whether certain private firms enjoy lower marginal costs of tax planning, which facilitate greater income tax avoidance. Our results are consistent with the marginal costs of tax avoidance and the separation of ownership and control both influencing corporate tax practices.

We examine the relations between tax avoidance and two components of firm risk (priced risk and idiosyncratic risk) using latent class mixture models. OLS regressions suggest that tax avoidance is negatively related to both priced risk and idiosyncratic risk. However, results from latent class mixture models reveal that 35.6 (58) percent of the sample exhibits a significant positive association between tax avoidance and priced (idiosyncratic) risk and firm characteristics are strikingly different across the latent classes. We use these differences to develop parsimonious models to predict latent class assignments, which we then use to demonstrate that firms predicted to have a positive relation between tax avoidance and priced risk or idiosyncratic risk have more negative future tax outcomes, including higher relative cash tax rate volatility, larger additions to tax reserves, larger payouts to tax authorities, and more negative tax-related news coverage over the following three years. Data Availability: Data are available from the public sources cited in the text.