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Corporate Taxes and Corporate Social Responsibility

This paper examines the impact of corporate taxes on firms’ corporate social responsibility (CSR), by exploiting the staggered changes in corporate taxes across U.S. states as a quasi-natural experiment. Firms enhance CSR performance significantly following tax cuts, but they do not reduce CSR in response to tax increases, consistent with the rigidity of CSR. The effect of tax decrease on CSR is more pronounced for firms that are more affected by state-level tax changes, more financially constrained, headquartered in more CSR-friendly states, owned by more socially responsible institutional investors, in more competitive industries, or led by CEOs who are more long-term oriented. The evidence suggests that tax cuts alleviate financing constraints, thereby enabling firms to be more socially responsible. Overall, our findings shed light on how fiscal policy shapes companies’ incentives to be socially responsible.