Corporate Tax Behavior and Political Uncertainty: Evidence from National Elections around the World

53 Pages Posted: 20 Sep 2014 Last revised: 12 Apr 2018

See all articles by Qingyuan Li

Qingyuan Li

Wuhan University - School of Economics and Management

Edward L. Maydew

University of North Carolina at Chapel Hill

Richard H. Willis

Vanderbilt University - Accounting

Li Xu

Washington State University, Vancouver

Date Written: April 12, 2018

Abstract

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

Li, Qingyuan and Maydew, Edward L. and Willis, Richard H. and Xu, Li, Corporate Tax Behavior and Political Uncertainty: Evidence from National Elections around the World (April 12, 2018). Vanderbilt Owen Graduate School of Management Research Paper No. 2498198. Available at SSRN: https://ssrn.com/abstract=2498198 or http://dx.doi.org/10.2139/ssrn.2498198

Qingyuan Li

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bai 430072
China

Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

Richard H. Willis

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States
615-343-1050 (Phone)
615-343-7177 (Fax)

Li Xu (Contact Author)

Washington State University, Vancouver ( email )

14204 NE Salmon Creek Avenue
Vancouver, WA WA 98686-9600
United States

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