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The effect of tax transparency on consumer and firm behavior: Experimental evidence

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  • Razen, Michael
  • Kupfer, Alexander

Abstract

Tax avoidance among large multinational corporations has considerably increased in recent years, triggering an intense discussion about how to ensure that all pay their ‘fair share’. We propose a novel experimental design to incentive-compatibly model the firm-consumer relationship in a consumer goods market. This new paradigm allows us to analyze the effect of increased tax transparency on consumer and firm behavior in a dynamic framework. We find that absent the threat of being directly exposed as a tax avoiding firm, only 26% of the firms decide to pay taxes. Once tax avoiding firms are identifiable in the market, this rate rises to 58%. Providing market participants additionally with information about the social costs of tax avoidance increases the fraction of tax paying firms further to 74%. We observe that these improvements are the consequence of firms proactively deciding to pay taxes. At the highest level of transparency, we further observe that consumers show a stronger proclivity to boycott tax avoiding firms, even if these firms offer cheaper prices.

Suggested Citation

  • Razen, Michael & Kupfer, Alexander, 2023. "The effect of tax transparency on consumer and firm behavior: Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 104(C).
    • Handle: RePEc:eee:soceco:v:104:y:2023:i:c:s2214804323000162
    DOI: 10.1016/j.socec.2023.101990
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    More about this item

    Keywords

    Economic experiment; Public good dilemma; Corporate tax avoidance; Consumer behavior; Firm behavior;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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