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

Mills, Lillian F.; Nutter, Sarah E.; Schwab, Casey M.

doi:10.2139/ssrn.1621861

Cited by 101 publications

(17 citation statements)

References 51 publications

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“…Although our hypothesis is directional, we recognize there are countervailing incentives pushing politically connected firms to forgo current tax savings to reap other benefits later (Bradshaw et al 2016;Erickson et al 2004;Mills et al 2013). There is also evidence casting doubt on the role of political relations in tax reporting.…”

Section: Research Hypothesis: Political Connections Constrain Tax Enfmentioning

confidence: 69%

“…We include multiple control variables known to affect tax avoidance (e.g., Chen et al 2010;Gupta and Mills 2002;Kim and Zhang 2016;Mills et al 2013;Wu et al 2007). We include the following firm-specific characteristics: profitability (ROA), the ratio of net income to total assets, and its standard deviation (Std.…”

mentioning

confidence: 99%

“…In untabulated results, we find firms with a connected board enjoy smaller penalties (scaled by assets). (Chen et al 2010;Hanlon and Heitzman 2010;Kim and Zhang 2016;Mills et al 2013;Wu et al 2007). Specifically, higher ETRs are associated with firms reporting higher levels of cash, inventory, and tangible and intangible assets, and locating in regions with more developed economies and less mature institutional environments, but reporting lower levels of net income and discretionary accruals.…”

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confidence: 99%

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Do Political Connections Weaken Tax Enforcement Effectiveness?

Lin

Mills

Zhang

et al. 2018

Contemporary Accting Res

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146

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This paper examines whether ties to politicians by corporate boards of directors weaken the effectiveness of tax authorities in constraining tax avoidance in China. We use a unique data set to measure geographic time‐variant tax enforcement, including the probability of income tax audit, the expertise of tax officers, and the consequences of underreporting tax liabilities. Based on a sample of 11,121 firm‐years from 2003 to 2013, we find that the deterrent effect of the probability that a firm's taxable income understatement will be detected and lead to heavy penalties is significantly undermined if the board is politically connected. To enhance our analysis, we use opportunities for income shifting, the most likely mechanism through which Chinese firms avoid taxes on an ongoing basis, to illustrate how connected boards exert power to unwind the constraining effect of tax enforcement. Overall, our results suggest that a board's ties to politicians can be a significant challenge to the effective enforcement of tax compliance in a politically controlled economy.

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Section: Research Hypothesis: Political Connections Constrain Tax Enfmentioning

confidence: 69%

mentioning

confidence: 99%

mentioning

confidence: 99%

See 1 more Smart Citation

Do Political Connections Weaken Tax Enforcement Effectiveness?

Lin

Mills

Zhang

et al. 2018

Contemporary Accting Res

Self Cite

146

View full text Add to dashboard Cite

show abstract

“…A key assumption in this study is that the noncompliant FTSE 100 firms consciously chose to withhold their full list of foreign subsidiaries in 2006 37 We also examine whether noncompliant firms were significantly more likely to have membership in an industry that traditionally benefits from government contracting, as defined in Mills et al [2013]. We estimate a linear probability model examining whether firms in industries commonly associated with government contracting are significantly more likely to be noncompliant firms in our sample, controlling for the other variables in model (1).…”

Section: Returns Analysis Around Actionaid's Report On Tax Haven Usagementioning

confidence: 99%

Public Pressure and Corporate Tax Behavior

Dyreng

Hoopes

Wilde

2016

J of Accounting Research

422

175

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We use a shock to the public scrutiny of firm subsidiary locations to investigate whether that scrutiny leads to changes in firms’ disclosure and corporate tax avoidance behavior. ActionAid International, a nonprofit activist group, levied public pressure on noncompliant U.K. firms in the FTSE 100 to comply with a rule requiring U.K. firms to disclose the location of all of their subsidiaries. We use this setting to examine whether the public pressure led scrutinized firms to increase their subsidiary disclosure, decrease tax avoidance, and reduce the use of subsidiaries in tax haven countries compared to other firms in the FTSE 100 not affected by the public pressure. The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behavior of large, publicly traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behavior.

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“…Analogous to this argument, Mills, Nutter and Schwab (2013) predict and find that federal contractors that rely heavily on government contracts for a substantial portion of their revenues face greater political scrutiny and, in turn, pay more taxes. They also find that contractors with greater bargaining power (i.e., the contractor provides a unique service or good, or the contract is of importance to national security) incur fewer tax-related costs.…”

mentioning

confidence: 90%