Abstract

http://ssrn.com/abstract=1621861
 
 

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The Effect of Political Sensitivity and Bargaining Power on Taxes: Evidence from Federal Contractors


Lillian F. Mills


University of Texas at Austin - McCombs School of Business

Sarah E. Nutter


George Mason University - Accounting Program; George Mason University - Mercatus Center

Casey M. Schwab


University of Georgia

October 11, 2011

McCombs Research Paper Series No. ACC-04-10

Abstract:     
We investigate whether politically-sensitive contractors pay higher taxes and whether their bargaining power reduces these tax costs. Using federal contractor data, we develop a new composite measure of political sensitivity that captures both the political visibility arising from federal contracts and the importance of federal contracts to the firm. Our primary proxies for bargaining power are based on the ratio of contract revenues not subject to competition to total contract revenues, the ratio of defense contract revenues to total contract revenues, and industry concentration ratios. We find that politically-sensitive firms pay higher federal taxes, all else equal. However, firms with greater bargaining power incur fewer tax-related political costs. Our study provides new evidence of the political cost hypothesis in a tax setting and the first evidence of the interactive effects of a firm’s political sensitivity and bargaining power on tax-related political costs.

Number of Pages in PDF File: 46

Keywords: political costs, market competition, bargaining power, effective tax rates, contracts, taxes

JEL Classification: M41, H26

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Date posted: August 2, 2010 ; Last revised: January 5, 2012

Suggested Citation

Mills, Lillian F. and Nutter, Sarah E. and Schwab, Casey M., The Effect of Political Sensitivity and Bargaining Power on Taxes: Evidence from Federal Contractors (October 11, 2011). McCombs Research Paper Series No. ACC-04-10. Available at SSRN: http://ssrn.com/abstract=1621861 or http://dx.doi.org/10.2139/ssrn.1621861

Contact Information

Lillian F. Mills
University of Texas at Austin - McCombs School of Business ( email )
Austin, TX 78712
United States
Sarah E. Nutter
George Mason University - Accounting Program ( email )
4400 University Drive
School of Management
Fairfax, VA
United States
703-993-1860 (Phone)
703-993-1809 (Fax)
George Mason University - Mercatus Center
3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States
Casey M. Schwab (Contact Author)
University of Georgia ( email )
Athens, GA 30602
United States
706-542-3596 (Phone)
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