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Effective tax rates and the political cost hypothesis: A re-evaluation of Australian evidence

Published on 01 Feb 12 by "AUSTRALIAN TAX FORUM" JOURNAL ARTICLE

This paper examines the relationship between effective tax rates and firm size. The political cost hypothesis suggests that the very largest firms would face higher effective tax rates, while the political power hypothesis suggests that larger firms are better able to lobby government and reduce their effective tax rate. Conversely larger firms have access to better tax planning resources and so could reduce their effective tax rate. The results in this paper show a non-linear relationship between size and effective tax rate. In contrast to the extant Australian literature this paper documents evidence in support of the political cost hypothesis.

Author profiles:

Sinclair Davidson
Sinclair works for the School of Economics and Finance, Business, RMIT University.
Current at 1 February 2012

 
Richard Heaney
Richard works for School of Accounting and Finance, University of Western Australia.
  • Current at 1 February 2012

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