Taxes and firm size: Political cost or political power?

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 competing theories on this relation: The political cost theory, suggesting a positive size-ETR relation, and the political power theory, suggesting a negative size-ETR relation. Using a unique data set of 56 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 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, we extend our analysis to a cross-country meta-data set; this extension enables us to investigate explanations for the two competing theories in more detail. We find that Hofstede’s cultural dimensions theory, a transparency index and a corruption index explain variation in the size-ETR relation. Independent of the two theories, we also find that tax planning aspects potentially affect the size-ETR relation. To our knowledge, these explanations have not yet been investigated in our research context.

Analysis of Good Corporate Governance and Its Effect on Aggressive Tax Avoidance, Profitability and Company Value.

“…The profitability variable has an insignificant negative impact on the aggressiveness of tax avoidance which means that the higher the profitability, then the tax avoidance aggressiveness will decrease. This research is in accordance with the political power theory, which explains that large-sized companies have a high effective tax rate because large companies become a public spotlight and a target of government regulations that cause companies to pay taxes higher than they supposed to pay (Belz et al, 2016).…”

Taxation efficiency and accounting assisted transparency, insight into a European framework

“…EU, USA), while taxation is focused to a more narrow framework (Lepadatu et al, 2014). Also, the accounting performance and examination of financial states of a company are connected with taxation issues upon a merge or a buy-out, while taxation is a factor that influences the choice of company form and structure (Belz et al, 2019).…”

Corporate social responsibility and tax avoidance

“…Furthermore, it may be insightful to take into account empirical evidence that tax avoidance activities and CSR behavior are related to firm characteristics, such as firm size (Bachas, Fattal Jaed, & Jensen, ; Belz, von Haden, & Steffes, ). In our model, this could be incorporated by interpreting the costs of tax avoidance and the relevance of the CSR objective as functions of these firm features.…”