Are Reputational Costs a Determinant of Tax Avoidance?

Abstract

We expect firms with the greatest exposure to reputational damage among consumers will engage in lower levels of tax avoidance to minimize unwanted scrutiny that could impair the firms’ reputation. We identify a set of firms with valuable consumer reputation using Harris Interactive’s EquiTrend survey, which surveys consumers about their perceptions of valuable and prominent brands. We find mixed evidence in support of our hypothesis that firms with valuable brands will engage in less tax avoidance. Specifically, we find firms with valuable consumer brands exhibit higher effective tax rates and industry adjusted cash effective tax rates than a set of matched control firms. We also find firms with valuable consumer brands are less likely to report effective tax rates below salient cutoff points (30, 25, 20 and 10 percent). However, we find no evidence firms with valuable brands are less likely to operate in a tax haven.