The Political Importance of Financial Performance

Abstract

AbstractAsset mobility is thought to constrain taxation, as firms with mobile assets can avoid taxation by locating their assets in low‐tax jurisdictions. Firms with immobile assets then face higher taxes. By considering the political incentives that accompany widespread financialization, we identify a new limit to the targeting of immobile firms: Publicly traded firms with immobile underlying assets lose more value in financial markets when taxes are increased, as shareholders anticipate that these underlying assets cannot be withheld from taxation. When governments care about this loss in value, their incentive to tax immobile, publicly traded firms declines. Political concern for financial performance therefore limits the extent to which immobile assets can be targeted for taxation. We argue that broad‐based participation in the stock market and democratic political institutions increase political concern for financial performance. We discuss the implications of the theory and findings for policy autonomy, firm ownership, and economic voting.