Public pressure on corporate tax behaviour works

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An interesting new academic paper has been published suggesting that pressure from activists has a significant impact on corporate tax behaviour.

The paper is entitled 'Public Pressure and Corporate Tax Behavior' and is by Scott D. Dyreng, Jeffrey L. Hoopes and Jaron H. Wilde, each based in a US university.

Published in July, the abstract (summary) of this paper says:

We examine whether public pressure related to compliance with subsidiary disclosure rules influences corporate tax behavior.

ActionAid International, a non-profit activist group, levied public pressure on non-compliant U.K. firms in the FTSE 100 to comply with a rule requiring U.K. firms to disclose the location of all of their subsidiaries.

We use this natural experiment to examine whether the public pressure led scrutinized firms to decrease tax avoidance and reduce the use of subsidiaries in tax haven countries relative to other firms in the FTSE 100 not affected by the public pressure.

The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behavior of large publicly-traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behavior.

The Action Aid methodology (which had its origins in work I did for the TUC in 2009 and for the Tax Justice Network the same year) was simple, but effective. It simply counted the number of tax havens a FTSE 100 company had and if they did not disclose demanded that they comply with the law on this issue. Publicity was given to the issue. The result was surprising (from the paper):

Using a difference in differences research design, we find that FTSE 100 firms that ActionAid specified in the report as not compliant with subsidiary disclosure rules (noncompliant firms) report higher effective tax rates following the public scrutiny, indicating a decrease in tax avoidance relative to FTSE 100 firms that were not affected by the scrutiny (compliant firms). Specifically, our estimates suggest a 3.7 percentage point increase in the effective tax rates (ETRs) of noncompliant firms relative to the effective tax rates of compliant firms in the years following the initial public pressure to comply.

Campaigning works. I've never doubted it, but it's good to have it confirmed.