Tax Aggressiveness and Political Corruption

• In Event: Taxation

Abstract

In this study, we examine the relation between political corruption and corporate tax aggressiveness among firms headquartered in the U.S. Our measure of political corruption is based on yearly conviction rates of public officials included in the Department of Justice’s Public Integrity Section annual reports. We find that firms headquartered in politically corrupt districts engage in more tax aggressiveness, as captured by FIN 48 tax reserve balances. This finding is consistent with political corruption reflecting the social environments and cultural norms of firms’ headquarters, with tax aggressiveness being viewed as less socially deviant in districts with more convictions of public officials. We find corroborating evidence when tax aggressiveness is alternatively measured based on the existence of subsidiaries in identified tax haven jurisdictions. The results of our study extend the literature examining the determinants of tax aggressiveness by documenting how political corruption impacts the reputational cost effect associated with tax aggressiveness. Our findings also expand our understanding of how political corruption impacts firms’ accounting choices.

Authors

• Lauren A. Cooper, West Virginia University

• Chase Michael Potter, Washington University in Saint Louis

• John S. Treu, West Virginia University