Partisan politics in corporate taxation

This paper studies the effects of political factors, mainly partisanship, on corporate taxes in the past 30 years-a period of intensifying competitive pressure in Europe. The consideration of decision-makers who have ideological preferences yields in standard tax competition models the hypothesis that left-wing leaders set higher corporate tax rates. In the empirical analysis, we introduce an innovative measure of ideology derived from content analysis of party manifestos into the public finance literature. The results support our main hypothesis, but we also find evidence that the partisan effect declines in the course of time. Moreover, we are able to reveal that the observed effect is mainly driven by the legislatures' stance on welfare policies. Finally, we show that a higher degree of government fragmentation, as well as the leadership of a head of government with an educational background in law counteracts the general tendency to lower tax rates.

► We introduce a measure of ideology derived from content analysis of party manifestos. ► Using this data we find a robust effect of partisanship on corporate taxes in Europe. ► This partisan effect declines over time due to intensifying tax competition. ► The legislatures' stance on welfare policies is the driving force of the effect. ► Biased perceptions of capital mobility can also have an impact on tax setting.