Taxes and Firm Size: Political Cost or Political Power?

Journal of Accounting Literature (42) 2019

43 Pages Posted: 1 Dec 2015 Last revised: 21 Feb 2019

See all articles by Thomas Belz

Thomas Belz

University of Mannheim

Dominik von Hagen

University of Mannheim - Department of Business Administration and Taxation

Christian Steffens

University of Mannheim

Date Written: January 30, 2018

Abstract

Using a meta-regression analysis, we quantitatively review the empirical literature on the relation between effective tax rate (ETR) and firm size. Accounting literature offers two competing theories on this relation: The political cost theory, suggesting a positive size-ETR relation, and the political power theory, suggesting a negative size-ETR relation. Using a unique data set of 49 studies that do not show a clear tendency towards either of the two theories, we contribute to the discussion on the size-ETR relation in three ways: First, applying meta-regression analysis on a US meta-data set, we provide evidence supporting the political cost theory. Second, our analysis reveals factors that are possible sources of variation and bias in previous empirical studies; these findings can improve future empirical and analytical models. Third, we extend our analysis to a cross-country meta-data set; this extension enables us to investigate explanations for the two competing theories in more detail. We find that Hofstede’s cultural dimensions theory, a transparency index and a corruption index explain variation in the size-ETR relation. Independent of the two theories, we also find that tax planning aspects potentially affect the size-ETR relation. To our knowledge, these explanations have not yet been investigated in our research context.

Keywords: Effective tax rate, Firm size, Political cost theory, Political power theory, Meta-regression analysis

JEL Classification: H25, H26, M41

Suggested Citation

Belz, Thomas and von Hagen, Dominik and Steffens, Christian, Taxes and Firm Size: Political Cost or Political Power? (January 30, 2018). Journal of Accounting Literature (42) 2019. Available at SSRN: https://ssrn.com/abstract=2697468 or http://dx.doi.org/10.2139/ssrn.2697468

Thomas Belz

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Dominik Von Hagen (Contact Author)

University of Mannheim - Department of Business Administration and Taxation ( email )

D-68131 Mannheim
Germany

Christian Steffens

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

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