Partisan Politics and the Dynamics of Corporate Tax Policy in the United States, 1986-2012

Despite conventional wisdom that left-leaning governments set high corporate tax rates, firms’ effective tax rates are lower than national tax rates even under left-leaning governments. I argue that left-wing governments are reluctant to cut corporate tax rates to avert high constituency costs, but compensate by offering nontransparent policy instruments like tax incentives. These nontransparent policy instruments avoid constituency costs, while promoting economic growth and job creation and encouraging campaign donations. Right-wing governments achieve these aims through corporate tax rates because they do not pay constituent costs for them. I test my argument by using a Bayesian Item Response Theory model to examine the voting behavior of US Senators in corporate tax legislation for the period 1986-2012. The findings support the argument.