The Importance of the Political Process on Corporate Tax Policy

Few would argue that the difficulty in making legislative changes influences policy decisions and often results in less timely and responsive legislation. Despite this, economic research on corporate tax policy often excludes consideration of the political process. This study examines the impact of the political and economic factors on several measures of corporate tax rates and tax incentives offered across 19 developed countries. Our results indicate that while economic conditions influence the rate of tax set by governments, the political process of the federal government also has a significant impact on the economic stimulus given. The impact of the political process on the ability to enact legislation is significant after controlling for economic factors indicating that in a global economy, it will become increasingly important for governments to find opportunities to work within their systems to enact legislation that attracts foreign direct investment and increases domestic growth.