Does It Cost to Be Politically Connected? An Examination of the Grabbing Hand Hypothesis Using Corporate Taxes

Abstract

We study a channel through which politicians can use corporate taxes to extract firm’s resources. We find that politically-connected firms pay higher taxes than their non-connected counterparts. Using election as an exogenous shock, we also observe that politically-connected firms pay higher taxes during election years to support the incumbent political regime. The results of the study indicate that favorable economic indicators, e.g. government tax revenue, are important to politicians, and provide rent seeking incentive to achieve their political objective.