Are Corruption and Corporate Tax Avoidance in the U.S. Related?

In this study, we examine whether state-level corruption and corporate tax avoidance in the U.S. are related. Using a sample of 36,078 U.S. firm-year observations from 1998 to 2014, we find that corruption is significantly positively related to tax avoidance. Our main finding is consistent across a series of robustness tests. In additional analysis at the state-level, we observe that corruption is significantly positively related to corporate tax avoidance in states that have low levels of litigation risk, irrespective of whether the states rank high or low in terms of corporate governance, social capital or money laundering. We also correlate state- and firm-level corruption with firm-level corporate tax avoidance and find that the interaction terms are generally significantly positively related to corporate tax avoidance. Finally, we show that state-level corruption and corporate tax avoidance are complementary across industry sectors. Overall, our results indicate that the broader state-level corruption (cultural) effects of where a firm is headquartered have significant consequences for corporate tax avoidance