Corporate lobbying and tax avoidance

This study examines whether firms that engage in lobbying activity tend to also participate in tax avoidance strategies. Much of the existing research on firm-level political activity focuses on the benefits associated with political connections. Fewer studies have highlighted the implications of firms pursuing these types of connections. We provide evidence that firms that lobby have a higher level of tax avoidance than firms that do not lobby. To draw stronger causal inferences and account for the inherent endogeneity in our research question, we conduct two sets of tests. First, we instrument lobbying activity with an indicator that captures the industries that are most likely to engage in lobbying activity. Second, we follow the prior literature and use the investigation of lobbyist Jack Abramoff as a negative shock to the benefits associated with lobbying activity. Results from both sets of tests provide reasonable evidence that causation flows from lobbying activity to tax avoidance instead of the other way around.