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

Can firms extract policy concessions by hiring former members of Congress (MCs)? I argue that firms use personnel with a background in politics to keep regulators away. With an empirical focus on tax enforcement, I present comprehensive evidence that firms can use MCs to avoid regulatory enforcement. Hiring MCs decreases firm-level tax rates—highly connected MCs who served on committees responsible for tax policy produce the largest decrease. Leveraging a novel handcoded dataset of tax audits, I show that hiring an MC is associated with a lower probability of being audited. The change in enforcement has important consequences: hiring an MC is associated with smaller fines and with uncertain tax positions being automatically accepted due to lapses in the statute of limitations. This indicates that rules are enforced differently against politically connected firms, shedding new light on the role of connections in the American political economy.