Judge Ideology and Corporate Tax Planning
56 Pages Posted: 27 Jan 2020 Last revised: 11 Jun 2021
Date Written: June 10, 2021
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
Suggested Citation: Suggested Citation