Judge Ideology and Corporate Tax Planning

Abstract

The judicial branch of the federal government plays a critical role in interpreting tax laws by resolving disputes between corporations and the Internal Revenue Service (IRS). This study investigates whether and how it affects corporate tax planning. We find that corporations engage in less aggressive tax planning when Circuit Court and Tax Court judges are more liberal. This effect is economically significant and robust across various measures of tax planning including cash effective tax rate and unrecognized tax benefits. We further detail specific tax planning tactics in response to liberal judge ideology, including shifting less income overseas and conducting more tax planning in foreign jurisdictions. Corporations also engage in forum shopping in tax litigations to avoid liberal judges. Finally, we show that IRS enforcement complements the judge ideology effect. Overall, our evidence helps paint a picture of how the three branches of government jointly influence corporate taxation.

Keywords: Judge ideology, federal judiciary, tax planning, income shifting, forum shopping, Internal Revenue Service

JEL Classification: H25, H26, K34, K41, K42