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Domestic Institutions and the Taxing of Multinational Corporations

Nathan M. Jensen
DOI: http://dx.doi.org/10.1111/isqu.12015 440-448 First published online: 1 September 2013


Political scientists have examined how domestic politics and the competition for international capital affect the setting of national tax rates. In this paper, I explore how political institutions, specifically the level of democracy, affect firm-level taxation across the world. I argue that electoral competition leads democratic governments to higher levels of taxation on firms. Using a data set on firm tax payments on the foreign affiliates of US multinational corporations from the US Bureau of Economic Analysis, I show that there are large variations within countries on the tax burdens faced by firms that are not explained by national tax rates. I find evidence that the mobility of the specific investment project, the types of spillovers these investments provide to a community, and attributes of the parent firm are all important determinants of taxation. While firm-level factors clearly affect corporate taxation, I argue that democratic institutions limit the offering of tax incentives and generate electoral benefits to policing tax avoidance by multinational corporations. After controlling for parent firm and foreign affiliate–level factors, I find that democratic countries generate as much as 26% more tax revenues from multinational corporations relative to authoritarian countries.

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