The Effect of Tax Transparency on Consumer and Firm Behavior: Experimental Evidence

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.