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Corporate Taxes and Corporate Social Responsibility

Apr 1, 2022 11:00 am - 12:30 pm AEDT


Abstract

We examine the impact of corporate taxes on corporate social responsibility (CSR) by exploiting the staggered changes in state-level corporate income tax rates. CSR performance significantly improves following tax cuts, consistent with firms’ heavy reliance on internal funds for CSR investments. By contrast, tax increases have no significant effect on CSR performance, implying that CSR commitments are sticky on the upside. The sensitivity of CSR performance to tax cuts is more evident for firms with greater tax exposure, tighter financial constraints, or stronger prosocial preferences. Additional analysis validates the positive effect of tax cuts on CSR using the 2017 federal tax reform. Overall, our findings reveal essential CSR features and illustrate how corporate tax policy drives corporate sustainability.