We develop an industry equilibrium model to study how corporate tax avoidance affects firm policies and industry outcomes. Tax avoidance and investment are complementary inputs, leading the largest firms to engage in the most avoidance and face the lowest effective tax rates, consistent with the data. We find that tax avoidance significantly increases both the average firm size and industry concentration, while reducing entry and the number of firms in equilibrium. Tax avoidance also generates capital misallocation, lowering productive efficiency. Large firms benefit disproportionately from tax avoidance, and consumers gain from a lower product price. We estimate the model to quantify the costs and benefits of tax avoidance to firms, taxpayers, and consumers, and evaluate the equilibrium effects of changes to the statutory tax rate and costs of avoidance.
