Corporate Tax Behavior and Political Uncertainty: Evidence from National Elections around the World
60 Pages Posted: 20 Sep 2014 Last revised: 1 Jul 2021
Date Written: Dec 28, 2020
We construct a global sample of firms in 36 countries with 158 elections to examine corporate tax behavior in the face of political uncertainty. We define political uncertainty as unpredictability regarding governmental policies or regulatory shifts, such as tax rates, tax enforcement, and general economic conditions, emanating from a possible change in political leadership. If insufficient information exists to develop plausible expectations about future tax- related outcomes, ambiguity-averse managers will attend to relatively more pessimistic priors and assume the worst-case scenario. Therefore, we expect firms to increase tax avoidance in election years, given uncertainty regarding the post-election tax and macroeconomic environment. Our results support this argument. Firms increase their corporate tax avoidance in election years, consistent with managers exercising current tax planning strategies while still most optimal to do so given post-election uncertainty. The effect is increasing in the political uncertainty associated with the election. Specifically, the result is larger for elections that are closely contested, representing uncertainty regarding the victor, and in countries with fewer electoral checks and balances. We document increased reshuffling of tax burdens across firms after elections, further supporting that elections reflect periods of heightened uncertainty regarding corporate taxation.
Keywords: corporate taxation; tax avoidance; political uncertainty; national elections
JEL Classification: H26, K42
Suggested Citation: Suggested Citation