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

46 Pages Posted: 2 Aug 2010 Last revised: 5 Jan 2012

See all articles by Lillian F. Mills

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Sarah E. Nutter

George Mason University - Department of Accounting

Casey M. Schwab

Indiana University - Kelley School of Business - Department of Accounting

Date Written: October 11, 2011

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.

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

JEL Classification: M41, H26

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: https://ssrn.com/abstract=1621861 or http://dx.doi.org/10.2139/ssrn.1621861

Lillian F. Mills

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Sarah E. Nutter

George Mason University - Department of Accounting ( email )

4400 University Drive
School of Management
Fairfax, VA
United States
703-993-1860 (Phone)
703-993-1809 (Fax)

Casey M. Schwab (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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