Abstract
AbstractWe examine the impact of home country democracy on corporate tax avoidance. Specifically, we investigate how two aspects of democracy (political freedom and electoral democracy) are associated with corporate tax avoidance, respectively. Political freedom reduces tax avoidance, as public scrutiny increases financial transparency risk of tax avoidance and participation in political decision‐making process raises willingness to pay taxes. Electoral democracy increases tax avoidance, as election increases tax system complexity which in turn increases tax avoidance. Furthermore, we find that corruption control and social stability strengthen the negative association between political freedom and tax avoidance. Corporate tax complexity as percentage of overall tax complexity strengthens the positive association between electoral democracy and tax avoidance. Additional tests show shareholder protection and being a common law country weaken the negative association between political freedom and tax avoidance, and strengthen the positive association between electoral democracy and tax avoidance. Robustness checks using colony history as instrumental variable confirm the results.
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