Judge Ideology and Corporate Tax Planning
66 Pages Posted: 27 Jan 2020 Last revised: 20 Oct 2020
Date Written: October 15, 2020
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 study the relation between the judicial branch and corporate tax planning, which paints the 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
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