The Effect of Political Sensitivity and Bargaining Power on Taxes: Evidence from Federal Contractors

Abstract

We investigate whether politically sensitive contractors pay higher taxes and whether their bargaining power reduces these tax costs. Using federal contractor data, we develop a new composite measure of political sensitivity that captures both the political visibility arising from federal contracts and the importance of federal contracts to the firm. We proxy for bargaining power using the firm-level proportion of contract revenues not subject to competition, the firm-level proportion of contract revenues arising from defense contracts, and industry-level concentration ratios. We find that politically sensitive firms pay higher federal taxes, all else equal. However, firms with greater bargaining power incur fewer tax-related political costs. Our study provides new evidence on the political cost hypothesis in a tax setting and the first evidence of the interactive effects of a firm's political sensitivity and bargaining power on tax-related political costs. JEL Classifications: M41; H26

The politics of accounting standard-setting: A review of empirical research

“…Although there are certainly examples of studies that use context-specific proxies and are more convincing (e.g. Mills et al, 2013;Sidhu and Whittred, 2003). 36.…”

Agressividade Tributária: Um Survey da Literatura

“…Existem também pesquisas contemporâneas que associam Agressividade Tributária a característi-cas, tais quais a responsabilidade social corporativa e sua reputação (Davis et al, 2016;Hoi, Wu & Zhang, 2013); marcas de consumo valioso (Watson, 2015); a conexões políticas (Brown, Drake & Wellman, 2015;Mills, Nutter & Schwab, 2013); uso de instrumentos financeiros derivados (Donohoe, 2015); fato de atuar em negócios diversificados (Zheng, 2017); e estar enfrentando dificuldades em planos de pensão (Chaudhry, Au Yong & Veld, 2017).…”

“…Os atributos ambientais onde a firma atua se constituem em um determinante da agressividade tributária, tais como a concorrência de mercado do produto (Kubick, Lynch, Mayberry & Omer, 2015), a concentração do clientes (Huang, Lobo, Wang, & Xie, 2016), a atuação em mercados internacionais (De Simone, Klassen & Seidman, 2017;Markle, 2016) Existem evidências de ligações entre a Agressividade Tributária e custos políticos potenciais (Mills et al, 2013) e os efeitos de repetidas anistias fiscais (Shevlin, Thornock & Williams, 2017). Com a crescente concorrência global, a evolução tecnológica, as regras e a forma de evolução dinâmica do ambiente em que operam as empresas, há oportunidades para compreender o papel dessas condições na decisão sobre grau de Agressividade Tributária (Wilde & Wilson, 2017).…”

Political Connection and the Demand for Industry Specialist Auditors

“…For instance, Correia (2014) provides evidence that political connected firms are less likely to be subject to SEC enforcement actions. Under a tax-related setting, some studies suggest that political connection can generate tax benefits (Brown, Drake, & Wellman (2015), diminishes the audit rates by IRS (Hunter & Nelson, 1995, Young, Reksulak, & Shughart, 2001) and reduces the political costs of being tax aggressive (e.g., Mills et al, 2013), hence leading to higher tax aggressiveness activities (Kim & Zhang, 2015). Further, D'Aveni (1990) suggest that firms with political and director connections are less likely to be associated with bankruptcy, suggesting that political connection increases client firms' prestige.…”