The Clientele Effect of Corporate Tax Lobbying

Abstract:     
We investigate the motivation for and outcome of corporate participation in shaping tax policy via lobbying. We hypothesize that firms lobby on tax issues when it is the most cost‐effective way to either reduce or preserve their tax burden and that those anticipating greater gains allocate more resources to their lobbying effort. This effort, in turn, differentiates aggressive from defensive lobbying, and it is the aggressive firms who exhibit measurable change in future tax rates. The empirical results are consistent with the hypotheses. Among firms involved in lobbying, those with low long‐run tax rates are more likely to lobby on tax issues. Among firms that lobby on tax issues, only those engaged in aggressive lobbying exhibit a negative relation between the magnitude of tax lobbying expenditures and future tax rates. We estimate that for each dollar the aggressive firms invest in tax lobbying, they realize a tax savings between $6 and $37.

working papers series