Supporting Tax Policy Change Through Accounting Discretion: Evidence from the 2012 Elections

Abstract

Some corporations attempt to lessen their tax burden through active involvement in the legislative process. We identify firms that contributed to congressional candidates who favor reductions in the U.S. corporate statutory tax rate. This support created a temporary incentive to manage effective tax rates up immediately prior to the 2012 general election. We document that these firms increased their reported effective tax rate in the two calendar quarters preceding the election relative to adjacent periods and to other firms supporting candidates in the same election. We also find that the variation in upward ETR management is correlated with proxies for potential reputational and capital markets costs as well as the strength of the relationship between candidates and firms. Our findings provide new evidence on financial reporting choices in support of corporate political activity and on the political cost hypothesis in the tax setting.

Keywords: tax policy; corporate political activity; political cost hypothesis

JEL Classification: G18; M51