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Taxes and firm size: Political cost or political power?

Thomas Belz, Dominik von Hagen and Christian Steffens

Journal of Accounting Literature, 2019, vol. 42, issue C, 1-28

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.

Keywords: Effective tax rate; Firm size; Political cost theory; Political power theory; Meta-regression analysis (search for similar items in EconPapers)
JEL-codes: H25 H26 M41 (search for similar items in EconPapers)
Date: 2019
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