Playing the Corporate Political Contributions Lottery: Evidence from Tax Avoidance

Abstract

In this study we examine the channels through which corporate political contributions affect firm-level tax outcomes. Firms that make political contributions are more likely than other firms to be singled out in rifle-shot tax legislation and receive firm-specific tax relief. The ex-ante payoff to political contributions if rifle-shot tax relief is the only benefit of making political contributions is negative, but for some firms the ex-post payoff is enormous. Firms also receive tax benefits when members of their industry cohort make political contributions, regardless of the firm’s own political contributions, consistent with politicians taking actions that benefit an entire class of assets or type of investment. Finally, we find some evidence that political connections affect tax enforcement, resulting in lower tax burdens for politically active firms.