Taxes and Firm Size: Political Cost or Political Power? A Meta-Regression Analysis

Abstract

Using a meta-regression analysis, we quantitatively review the empirical literature on the relation between effective tax rates (ETRs) and firm size. Accounting literature offers two opposing theories on this relation: The political cost theory suggests a positive size-ETR relation because larger firms have higher political costs such as serving public scrutiny. The political power theory suggests a negative size-ETR relation because larger firms have more political power, e.g., to favorably influence legislation. Using a unique data set of 47 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, we find a positive consensus estimate on the effect of firm size on ETR; thus, 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, in further analyses, we find additional explanations for the two opposing theories such as tax planning, Hofstede’s cultural dimensions theory, and various governance indicators.