Judge Ideology and Corporate Tax Planning
61 Pages Posted: 27 Jan 2020 Last revised: 13 Feb 2020
Date Written: December 19, 2019
We investigate whether and how the federal judiciary affects corporate tax planning. We find that firms 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. We further detail specific tax planning tactics in response to liberal judge ideology, such as shifting less income overseas, conducting more foreign tax planning, and acquiring more auditor-provided tax services. Firms also avoid liberal judges through forum shopping. Finally, we show that IRS enforcement complements the judge ideology effect. Overall, we are the first to demonstrate the judicial branch as a key determinant of corporate tax planning, which contributes to a more complete understanding of tax enforcement.
Keywords: Judge ideology, federal judiciary, tax planning, income shifting, forum shopping, Internal Revenue Service
JEL Classification: H25, H26, K34, K41, K42
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