Taxes and firm size: Political cost or political power?

Belz, Thomas ; Hagen, Dominik von ; Steffens, Christian

Document Type: Conference presentation
Year of publication: 2016
Conference title: EAA Annual Congress 2016
Location of the conference venue: Maastricht, Netherlands
Date of the conference: 11.-13. Mai 2016
Publication language: English
Institution: Business School > ABWL u. Betriebswirtschaftliche Steuerlehre (Schreiber 1999-2019)
Subject: 330 Economics
Classification: JEL: H25 , H26 , M41,
Keywords (English): Effective tax rate , Firm size , Political cost theory , Political power theory , Meta-regression analysis
Abstract: Using a meta-regression analysis, we quantitatively review the empirical literature on the relation between effective tax rate (ETR) and firm size. Accounting literature offers two opposing theories on this relation: The political cost theory suggests a positive size-ETR relation because larger firms have higher political costs such as serving public scrutiny. The political power theory suggests a negative size-ETR relation because larger firms have more political power, e.g., to favorably influence legislation. Using a unique data set of 49 studies that do not show a clear tendency towards either of the two theories, we contribute to the discussion on the size-ETR relation in three ways: First, applying meta-regression analysis on a US meta–data set, we find a positive consensus estimate on the effect of firm size on ETR; thus, we provide evidence supporting the political cost theory. Second, our analysis reveals factors that are possible sources of variation and bias in previous empirical studies; these findings can improve future empirical and analytical models. Third, in further analyses on a cross-country meta–data set, we find additional explanations for the two opposing theories. To our knowledge, these explanations have not yet been investigated in our research context. In particular, we find that tax planning aspects, such as the introduction of check-the-box rules in the US, potentially affect the size-ETR relation. In addition, we find supporting evidence that Hofstede’s cultural dimensions theory and various governance indicators affect the size-ETR relation.

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