Political Power May Mean Lower Taxes For Federal Contractors

 

Takeaway

  • Firms that are politically sensitive to government scrutiny often pay higher taxes
  • If sensitive firms wield political power, they may avoid higher taxes

It’s not what you know, it’s who you know. And how you use those relationships to your benefit.

McCombs Professor Lillian Mills'research examines corporate tax payments by federal contractors to determine the effect of political sensitivity and political power on the amount of taxes paid. In a recent presentation of her findings, she noted that while contractors face substantial scrutiny by the media, Congress and regulators, but they also wield political power.

Mills and her co-authors continue to investigate whether political power reduces the political costs contractors incur to avoid scrutiny. She said her and her co-authors are interested in two questions:

  1. Do firms that are politically sensitive to government scrutiny pay higher taxes?
  2. If that’s true, and some of those firms wield more political power, does that undo the relationship?

Mills said these questions are more important than they were 10 or 15 years ago because there has been a crisis of public confidence in the accounting system, due to the collapse of Enron and WorldCom and the failure of Arthur Andersen to rein in Enron.

“That created some difficulty of public confidence in the accounting system,” said Mills. “The recent financial crisis also creates a lack of confidence in our government as an appropriate watchdog.”

When government does scrutinize a company more closely, what are the deciding factors the bring on that scrutiny? One circumstance might be outsourcing all of a company's production overseas. Mills also noted that Congress considered preventing a homeland security contract award to Accenture some years ago because the company had established its headquarters in a tax haven. 

Mills and her coauthors defined political sensitivity as finding out if the government is watching a company, and whether the company cares if it is being watched. “Companies that have a high percentage of revenue from the government ought to be more sensitive to government scrutiny.”

According to Mills, “If a company is more politically sensitive, it is paying higher taxes, all else equal; but if it has political power, then that relationship gets unwound.

“So even if you're sensitive, if you wield enough power, you don't pay more taxes.”

Mills defined sources of political power as including the number of voting citizens a company employs and the extent of lobbying a company does, as well as whether or not the company is a defense contractor or contracts in an area in which the government has limited suppliers.

Whitney Starling contributed to this story.

Faculty in this Article

Lillian Mills

Chair and Professor, Department of Accounting McCombs School of Business, The University of Texas at Austin

Lillian Mills received her BA from the the University of Florida in 1980 and her Ph.D. from the University of Michigan in 1996. Her research...

About The Author

TXE Staff

Staff, Texas Enterprise

The Texas Enterprise staff covers a broad swath of disciplines and interests. Writers, researchers, technicians and artists all contribute to the...

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