Political Costs and Corporate Tax Avoidance: Evidence from Sin Firms

46 Pages Posted: 9 Sep 2017 Last revised: 25 Apr 2021

See all articles by Cong Wang

Cong Wang

The Chinese University of Hong Kong, Shenzhen

Ryan J. Wilson

University of Oregon

Shuran Zhang

Hong Kong Polytechnic University

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: August 19, 2019

Abstract

The products and services of firms operating in sin industries (alcohol, tobacco, gaming, and firearms) run contrary to social norms and can produce significant negative externalities for society. As such, we expect that sin firms are at greater risk of incurring political costs in the form of additional regulation, higher excise taxes, or capital market intervention if they come under scrutiny for their income tax avoidance practices. Because of the nature of their products, regulators and policymakers are likely to face less pushback on new regulations or taxes on these firms. Sin firms start with a lower ability to influence the political process than firms in non-sin industries. Consequently, we hypothesize and find that sin firms exhibit less tax avoidance than non-sin firms, particularly through uncertain and more risky tax avoidance strategies. The negative relationship between the status of sin firms and tax avoidance is less pronounced in firms that accumulate political capital via intensive lobbying activities. Exploiting changes in partisan control of the Congress and White House, difference-in-differences tests show that firearm firms engage in less (more) tax avoidance when the Democrats (Republican) control both the Congress and White House. Overall, we conclude that political costs play an important role in corporate tax avoidance decisions.

Keywords: political capital, political cost, tax avoidance, sin firms

JEL Classification: H26

Suggested Citation

Wang, Cong and Wilson, Ryan J. and Zhang, Shuran and Zou, Hong, Political Costs and Corporate Tax Avoidance: Evidence from Sin Firms (August 19, 2019). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3034635 or http://dx.doi.org/10.2139/ssrn.3034635

Cong Wang

The Chinese University of Hong Kong, Shenzhen ( email )

Ryan J. Wilson (Contact Author)

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Shuran Zhang

Hong Kong Polytechnic University ( email )

Hong Zou

The University of Hong Kong - Faculty of Business and Economics ( email )

China

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