Tax Planning Strategies and Their Relationship with Corporate Financial Performance

Abstract

This research investigates the complex and often paradoxical relationship between
corporate tax planning strategies and long-term financial performance, moving beyond conventional efficiency metrics to propose a novel, multi-dimensional performance
framework. While traditional literature predominantly frames tax planning as a valueenhancing activity through cash flow preservation, this study posits that aggressive
tax strategies can generate significant hidden costs and risks that erode sustainable
competitive advantage. We introduce the concept of ’Tax-Induced Strategic Myopia,’
a phenomenon where excessive focus on tax minimization distorts capital allocation,
incentivizes suboptimal operational decisions, and weakens organizational resilience.
Through a mixed-methods approach combining a longitudinal analysis of financial
data from SP 500 firms (2010-2023) with qualitative case studies derived from executive interviews and internal audit reports, we develop a tripartite model linking tax
strategy to performance via three mediating channels: reputational capital, innovation
capacity, and strategic flexibility. Our results reveal a non-linear, inverted U-shaped
relationship, where moderate tax planning enhances performance, but beyond an optimal threshold, incremental tax savings correlate negatively with long-term profitability,
market valuation, and innovation output. The findings challenge the prevailing ’lower
effective tax rate equals superior performance’ axiom and contribute a new theoretical
lens for evaluating corporate tax strategy as an integral component of strategic risk
management rather than a purely financial engineering exercise.