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Political Economy of Corporate Tax Behavior, Earnings Management, and Market Power in Emerging and Advanced Economies
Issue Vol. 2 No. 02 (2025): VOLUME 02 ISSUE 02 --- Section Articles
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Abstract
The interaction between corporate taxation, political influence, market structure, and firm-level financial reporting behavior has become one of the most contested domains in contemporary political economy and accounting research. As governments rely increasingly on corporate income taxation while multinational enterprises expand their ability to shift profits across borders, firms have developed increasingly sophisticated strategies to influence both the measurement of taxable income and the political environment in which taxation is determined. This study develops an integrated theoretical and empirical framework that explains how earnings management, tax planning, political connections, and market concentration jointly shape corporate tax outcomes. Drawing upon insights from accounting, economics, and political economy, the article conceptualizes corporate taxation not as a neutral administrative process but as an arena of strategic interaction between firms and the state, mediated by institutional structures, lobbying activity, and market power. The theoretical backbone of the analysis is rooted in classical models of tax compliance and evasion, particularly the deterrence framework articulated by Allingham and Sandmo (1972), which frames tax behavior as a rational response to enforcement probability and penalties. However, this framework is extended by incorporating modern theories of corporate governance and incentives, such as those articulated by Armstrong et al. (2012), which emphasize the internal motivations of managers and the role of compensation structures in shaping tax planning aggressiveness.
A central empirical and conceptual anchor of the study is the body of evidence on Malaysian firms, especially the demonstration that earnings management can be used strategically to influence tax policy and political outcomes (Adhikari, Derashid, and Zhang, 2005). This evidence reveals that corporate reporting behavior is not merely reactive to tax rules but can be proactively deployed to shape the future design and enforcement of those rules. By embedding this insight within a broader cross-national and sectoral context, the article develops a dynamic theory in which firms adjust their financial reporting, lobbying intensity, and organizational structures in response to both market competition and anticipated policy changes. The analysis further incorporates research on political connections and effective tax rates (Adhikari, Derashid, and Zhang, 2006), showing how firms that are embedded in political networks are able to translate accounting strategies into durable fiscal advantages.
The article also engages deeply with recent research on market concentration and the rise of superstar firms, which has documented the growing dominance of a small number of highly profitable, often multinational enterprises in both advanced and emerging economies (Autor et al., 2020; Affeldt et al., 2021; Bajgar et al., 2021). These firms, because of their size, intangible asset intensity, and global reach, possess unparalleled capacity to shift profits and to lobby for favorable tax treatment. The study argues that this concentration of economic power fundamentally alters the tax policy equilibrium, weakening the state’s ability to tax capital effectively while increasing the burden on smaller, less mobile firms and on labor. By synthesizing these literatures, the article advances a unified framework that explains why corporate tax bases have eroded in many jurisdictions despite nominally stable statutory tax rates.
Methodologically, the study adopts a qualitative-quantitative synthesis grounded in longitudinal and comparative reasoning. Rather than presenting new numerical estimates, it integrates findings from existing empirical studies with a detailed theoretical model of firm behavior. This approach allows for a nuanced interpretation of how earnings management, profit shifting, and political influence interact over time. The results demonstrate that firms facing intense product market competition and those operating in highly concentrated industries adopt markedly different tax strategies, a pattern consistent with evidence from China (Cai and Liu, 2009) and from European and global contexts (Buijink et al., 2002; Blouin and Robinson, 2019).
The discussion situates these findings within broader debates on fiscal capacity, inequality, and globalization. It argues that the erosion of the corporate tax base is not an inevitable byproduct of globalization but the outcome of strategic behavior by powerful firms operating within permissive institutional frameworks. The article concludes by outlining policy implications, including the need for greater transparency, coordination across tax jurisdictions, and reforms to corporate governance that align managerial incentives with social objectives. In doing so, it contributes to a deeper understanding of how corporate taxation, accounting practices, and market power jointly shape the distribution of economic resources in the contemporary global economy.
Keywords
References
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