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Taxes and firm size: Political cost or political power?

Thomas Belz (Business School, University of Mannheim, 68131 Mannheim, Germany)
Christian Steffens (Business School, University of Mannheim, 68131 Mannheim, Germany)

Journal of Accounting Literature

ISSN: 0737-4607

Article publication date: 13 December 2018

Issue publication date: 30 June 2019



Using a meta-regression analysis, we quantitatively review the empirical literature on the relation between effective tax rate (ETR) and firm size. Accounting literature offers two competing theories on this relation: The political cost theory, suggesting a positive size-ETR relation, and the political power theory, suggesting a negative size-ETR relation. Using a unique data set of 56 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 on a US meta-data set, 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, we extend our analysis to a cross-country meta-data set; this extension enables us to investigate explanations for the two competing theories in more detail. We find that Hofstede’s cultural dimensions theory, a transparency index and a corruption index explain variation in the size-ETR relation. Independent of the two theories, we also find that tax planning aspects potentially affect the size-ETR relation. To our knowledge, these explanations have not yet been investigated in our research context.



Belz, T., Hagen, D.v. and Steffens, C. (2019), "Taxes and firm size: Political cost or political power?", Journal of Accounting Literature, Vol. 42 No. 1, pp. 1-28.



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