Partisan Responses to the Mobility of Firms: Incentives to Retain Firms and Tax

• In Event: Mobile Firms and the Political Economy of Taxation

Abstract

Has increased mobility of capital affected the policy choices of elected officials? I address this question by focusing a particularly important actor - corporations. Thanks to sharp decreases in transportation and communication costs, firms have become highly mobile. In response, policymakers have offered generous tax benefits to corporations in given locales since the (re)location of firms has domestic political consequences. In this article, building upon a vast literature on party politics and corporate tax policy, I argue that left governments, compared to right governments, are more likely to provide lower effective corporate tax burdens to retain mobile firms that already operates in their constituencies. Facing heavier electoral costs from cutting statutory tax rates and from firms’ move-outs, left-leaning governments provide favorable tax environments with mobile firms through tax treatment of which voters are not informed. To test the hypothesis, this study focuses on the partisanship of governors and state-level variation in tax burdens in the U.S. Using a database of public firms in the U.S. from 1996 to 2014, both fixed effects estimations and regression discontinuity design provide supportive evidence of my theory: mobile firms such as multinational corporations and firms operating in multiple states, pay lower effective corporate tax rates under Democratic governors than Republican governors. The findings have implications for broad debates on the effects of economic globalization on policy levers of governments and the roles of domestic politics.

Author

• Joonseok Yang, Columbia University