This study examines the link between effective tax rates (ETR) and political connec-
tions in developing economies. The political connections explanation is informed by the
observation that developing economies tend to be ‘‘relationship-based’’ rather than
‘‘market-based’’ capitalisms. Two proxies of political patronage are developed and
applied to a group of Malaysian firms over a 10-year period. We find firms with political
connections pay tax at significantly lower effective rates than other firms. Our results
suggest that political connections are an important determinant of ETR in relation-
ship-based economies.
2006 Elsevier Inc. All rights reserved.
Keywords: Political connections; Public policy; Effective tax rates; Relationship-based economies