The Revolving Door and Regulatory Enforcement: Firm-level Evidence on Tax Rates and IRS Audits

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I argue that hiring former legislators leads to regulatory forbearance, and firms use thisto pursue economic rents. I test the argument with data on firm-level taxes and theIRS’s enforcement activities. I compile a database of publicly listed firms, which havehired Members of Congress (MCs) in the period 2004-2015. I show that hiring a formerMC decreases the average company’s tax rate. The effect is strongest, when firms hirethe best connected former MCs, who served in committees responsible for oversightof the IRS. To investigate whether the effect is driven by selective enforcement, Icollect data on IRS audits and find that hiring a former MC is associated with a lowerprobability of being audited. Additional tests do not suggest that the findings aredriven by general rule changes or lobbying activities. This indicates that rules areenforced differently against politically connected firms.
Original languageEnglish
Number of pages28
Publication statusPublished - 2019

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