Do Tax Rates Affect CSR? A Natural Experiment from Corporate Tax Reforms

Do Tax Rates Affect CSR? A Natural Experiment from Corporate Tax Reforms

• Associate Professor of Finance Yiwei Fang

Abstract:

This study examines the relationship between tax changes and corporate social responsibility (CSR) investment by leveraging staggered state tax changes. By adopting a difference-in-difference (DID) model, we investigate the causal impact of tax hikes and cuts on CSR investment. Our findings reveal an asymmetric causal effect of corporate taxes on CSR investment. A tax increase significantly decreases CSR strength, while a tax cut significantly increases CSR performance and reduces company CSR concern issues. This effect is stronger for financially constrained companies, indicating that tax cuts provide them with financial resources to invest in CSR, while tax increases deter CSR investment. Furthermore, we specifically examine the differential effects on social and environmental aspects. Our findings indicate that tax cuts are associated with a stronger effect observed for social scores compared to environmental scores. These results have important implications for policymakers, emphasizing the need to consider firms' financial constraints when designing tax policies that promote CSR and encouraging responsible business practices.

 

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The Friday Research Presentations series showcases ongoing academic research projects conducted by Stuart School of Business faculty and students, as well as guest presentations by Illinois Tech colleagues, business professionals, and faculty from other leading business schools.