Corporate Tax Behavior and Political Uncertainty: Evidence from National Elections around the World

60 Pages Posted: 20 Sep 2014 Last revised: 10 Feb 2021

See all articles by Qingyuan Li

Qingyuan Li

Edward L. Maydew

University of North Carolina at Chapel Hill

Richard H. Willis

Vanderbilt University - Accounting

Li Xu

Washington State University, Vancouver

Date Written: Dec 28, 2020

Abstract

We construct a global sample of firms in 36 countries with 158 elections to examine corporate tax behavior in the face of political uncertainty. We define political uncertainty as unpredictability regarding governmental policies or regulatory shifts, such as tax rates, tax enforcement, and general economic conditions, emanating from a possible change in political leadership. If insufficient information exists to develop plausible expectations about future tax- related outcomes, ambiguity-averse managers will attend to relatively more pessimistic priors and assume the worst-case scenario. Therefore, we expect firms to increase tax avoidance in election years, given uncertainty regarding the post-election tax and macroeconomic environment. Our results support this argument. Firms increase their corporate tax avoidance in election years, consistent with managers exercising current tax planning strategies while still most optimal to do so given post-election uncertainty. The effect is increasing in the political uncertainty associated with the election. Specifically, the result is larger for elections that are closely contested, representing uncertainty regarding the victor, and in countries with fewer electoral checks and balances. We document increased reshuffling of tax burdens across firms after elections, further supporting that elections reflect periods of heightened uncertainty regarding corporate taxation.

Keywords: corporate taxation; tax avoidance; political uncertainty; national elections

JEL Classification: H26, K42

Suggested Citation

Li, Qingyuan and Maydew, Edward L. and Willis, Richard H. and Xu, Li, Corporate Tax Behavior and Political Uncertainty: Evidence from National Elections around the World (Dec 28, 2020). Vanderbilt Owen Graduate School of Management Research Paper No. 2498198, Available at SSRN: https://ssrn.com/abstract=2498198 or http://dx.doi.org/10.2139/ssrn.2498198

Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

Richard H. Willis

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States
615-343-1050 (Phone)
615-343-7177 (Fax)

Li Xu (Contact Author)

Washington State University, Vancouver ( email )

14204 NE Salmon Creek Avenue
Vancouver, WA WA 98686-9600
United States

No contact information is available for Qingyuan Li

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