Partisanship in Tax Planning

Abstract

U.S. firms are becoming increasingly partisan. This study examines whether and how the political alignment between a firm's management team and the incumbent president shapes the firm's tax planning strategies. Using detailed campaign contribution data for individual executives in S&P 500 firms, we find that executives politically aligned with the president are less aggressive in avoiding taxes, leading to lower tax risks. Next, we show that the impact of partisanship is more pronounced during the period of intensified political polarization. Further evidence reveals that reduced tax avoidance is driven by "ideological-induced optimism": political alignment reduces managers' perceived future political risks, especially in politically dependent firms, Republicanleaning firms, or firms lacking accumulated political capital via lobbying. Our results are robust using different tax avoidance measures. Overall, our findings suggest that partisanship is an important yet, until now, overlooked determinant of corporate tax strategies.

Keywords: partisanship, tax avoidance, campaign contribution, effective tax rate, tax risk JEL classifications: G12, G23, M40