Corporate Tax Behavior and Political Uncertainty: Evidence from National Elections around the World
53 Pages Posted: 20 Sep 2014 Last revised: 12 Apr 2018
Date Written: April 12, 2018
We examine corporate tax behavior in the face of political uncertainty. Because tax policy is an outcome of a political process, increased political uncertainty may be associated with changes in tax behavior. On one hand, uncertainty about whether a firm’s current tax strategies will be rendered less effective by election-related changes in the tax environment may induce a positive association between political uncertainty and tax avoidance behavior. On the other hand, anticipated election-related changes in regulatory detection, penalties, and fines may induce a negative association between political uncertainty and tax avoidance behavior. We construct a sample of firms exposed to 105 national elections in 30 countries. We find that firms increase their corporate tax avoidance in election years. This finding is consistent with firms exercising current tax planning strategies while it is still most optimal to do so given uncertainty regarding the corporate tax environment after the election. The effect is increasing in the political uncertainty associated with the election, specifically for elections that are closely contested, held in countries with fewer electoral checks and balances, and with pro-business incumbent governments. We find evidence of increased reshuffling of tax burdens across firms after elections, further support 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