Why public tax reporting might make some companies pay less

How can we make companies contribute enough to a country's finances? Around the world, pro-transparency activists argue that public reporting of tax data could shame businesses into paying their way.

Now, economists have produced what they describe as one of the first studies into the effects of a real-life tax transparency policy. Among other results, they found that some organisations may actually be more likely to stop paying tax as a result of the policy.

A new working paper from the National Bureau of Economic Research looks into what happened when, in 2013, the Australian parliament passed a bill requiring public disclosure of tax data from companies with a reported income of over AUD100 million ($78.2 million) on their Australia company tax return. This was later amended to exclude Australian-owned private firms with an income of less than AUD200 million ($156 million).

Here’s three of the key findings:

Some companies may actually pay less tax as a result of the policy

The researchers had access, thanks to the Australian Taxation Office (ATO), to “de-identified aggregated data” revealing what taxes were paid by companies who filed a tax return in the country between 2011 and 2014 - the year when some of them were first required to disclose their data publicly.

When studying it, they found that among public companies and foreign-owned companies that did have to disclose their data, there was a “slight increase in the percentage of firms paying no tax.” Meanwhile, there was a “slight decrease” in the same measure for private firms.

“Whether firms are subject to disclosure or not, additional regulatory scrutiny by the ATO likely applied some pressure to remit tax for fear of political backlash,” the researchers wrote. “However, in the public company setting, the pressure to reduce tax payments by shareholders likely tempers that pressure, or even outweighs it.”

Lots of firms may have taken action to avoid having to disclose their data

While examining the ATO data, the researchers also saw a jump among all types of firms in the number reporting total income just under the threshold, suggesting that many were taking action to avoid having to publish their information.

The jump was particularly pronounced among private firms - 65% more private Australian owned firms and 73% more private foreign-owned firms declared incomes just below the threshold in the first year disclosure was required. The researchers believe that private firms think the costs of disclosing data are “relatively higher” for them because less information is already available to the public.

The effects on public opinion of big business are minimal

The researchers looked at brand sentiment data from the international polling firm YouGov, examining the effect on big brands’ reputations of having to disclose their tax information, of being revealed to pay no tax, and of experiencing negative media coverage related to their disclosure.

“Across all three dependent variables, we fail to document a significant effect, consistent with this disclosure event in Australia not meaningfully changing consumer sentiment,” the researchers wrote.

“This result may reflect that for large, influential brands public perception is not easily shaken or that there was already a widespread belief that these firms did not pay their “fair share” of taxes,” they added.

Meanwhile, the researchers carried out a wider survey of their own design, which found there was some effect on public perception of private companies overall. “Private firms experienced a small decline in consumer sentiment” when they faced increased scrutiny over their tax arrangements, the researchers wrote, "Consumer sentiment surrounding tax disclosure appears more fragile for relatively smaller firms."

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