CEOs' Political Ideology, Social Capital and Corporate Tax Avoidance

ABSTRACT Building on institutional theory, we explore the interaction between social capital and CEO political ideology on corporate tax avoidance. Using CEOs' political donations to identify their political ideology, we find that firms led by Republican CEOs tend to have lower (higher) effective tax rates when located in communities with lower (higher) social capital, indicating a higher (lower) propensity for tax avoidance, compared to firms led by non‐Republican CEOs. Our findings support the U.S. Internal Revenue Service's (IRS) view that tax compliance behaviour is inherently a sociopolitical construct. Our results suggest that tax policymakers and other regulators should pay more attention to social capital at the community level to foster ethical corporate behaviour in relation to tax compliance. Overall, we provide the tax authorities with useful insights into corporate tax compliance, which are applicable to both U.S. and international settings, particularly in regions with distinct political and social norms.