Judge Ideology and Corporate Tax Planning

56 Pages Posted: 27 Jan 2020 Last revised: 11 Jun 2021

See all articles by Travis Chow

Travis Chow

The University of Hong Kong

Allen Huang

Hong Kong University of Science and Technology - Department of Accounting

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting

Terry J. Shevlin

University of California-Irvine

Date Written: June 10, 2021

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

Suggested Citation

Chow, Travis and Huang, Allen and Hui, Kai Wai and Shevlin, Terry J., Judge Ideology and Corporate Tax Planning (June 10, 2021). Available at SSRN: https://ssrn.com/abstract=3513154 or http://dx.doi.org/10.2139/ssrn.3513154

Travis Chow

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Allen Huang (Contact Author)

Hong Kong University of Science and Technology - Department of Accounting ( email )

LSK Business School Building
HKUST
Clear Water Bay, Kowloon
Hong Kong

HOME PAGE: http://www.AllenHuang.org

Kai Wai Hui

The University of Hong Kong (HKU) - Department of Accounting ( email )

Pokfulam Road
Hong Kong, Pokfulam
Hong Kong

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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