When Tax Return Disclosure Stokes Outrage

Tuck professor Leslie Robinson examines the effects of publicizing tax information.

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Robinson set out to discover how tax disclosures affect consumer confidence and investor sentiment.

In the waning days of 2015, Twitter lit up with angry comments from Australians who felt they’d been cheated.

“Hey, PM @TurnbullMalcolm – can you explain why @exxonmobil Australia earned $9.6 billion dollars and paid zero tax?”

“It seems I paid more tax than @Qantas @VirginAustralia @VodafoneAU…”

“@Qantas If you’re the ‘Spirit of Australia’ Pay some *&%$#$*& tax eh? #auspol”

These people were reacting to stories in the media declaring that a number of major Australian companies paid no income taxes in 2013-2014. Those stories were, in turn, based on a report from the Australian Taxation Office (ATO) divulging the data from a new tax return disclosure requirement that applied to Australian firms, and foreign firms doing business in Australia, who had a total income of more than $100 million. The ATO report contained just three numbers from each firm: total income, taxable income, and tax payable from the company tax return. By themselves, these figures said very little about why a company did or didn’t pay taxes. But the media latched on to the seemingly egregious cases where rich companies had zero tax liability, and the public was understandably outraged.

As Tuck associate professor Leslie Robinson explains in a new working paper, “Public Tax Return Disclosure,” this saga began in 2013, when the Australian legislature began debating a bill that would require the ATO to make public certain tax return information that was previously only available to the taxation office. The Tax Laws Amendment Bill passed later that year, with the intent of maintaining the integrity of Australia’s tax base and reducing the practice of multinational companies shifting income abroad to avoid taxation. Robinson and her co-authors Jeffrey L. Hoopes of the University of North Carolina at Chapel Hill, and Joel Slemrod of the University of Michigan, saw this new law as a rare opportunity to learn about the effects of public tax return disclosure. They examined how tax return disclosure impacts the corporate taxpayer and its various stakeholders, but they also discovered that tax disclosure policy can become a weapon of political blood sport.

Public disclosure of income tax returns—outside of U.S. presidential campaigns—is uncommon. A few Scandinavian countries make information from individual tax returns public. But disclosing corporate tax returns is even more unusual. Firms do report some tax expenses on their financial statements, but those expenses don’t match their true tax payments. That lack of transparency has only increased the public’s desire to see how much tax companies pay. Meanwhile, media reports on creative accounting schemes that facilitate tax avoidance have generated more public interest as well. Additional countries might want to require corporate tax disclosure, but they fear uncertainty. How will such disclosure affect consumer confidence and investor sentiment? And will it increase tax revenue and change corporate reporting? Those are the questions Robinson and her co-authors examined in Australia.

Consumers were less likely to do business with a private company that paid no taxes . . . maybe since there’s less information about these companies in general.

To answer the first question, the researchers analyzed surveys of general consumer sentiment on public companies from YouGov, an international market research firm. They also administered their own survey that asked specifically about consumer sentiment before and after the tax return disclosure. They found no consumer reaction in the surveys of general sentiment, and a small amount of negative reaction (consumer backlash) for large private companies in the tax-specific survey. “Consumers were less likely to do business with a private company that paid no taxes,” Robinson explains. “Maybe that’s because there was more of a surprise, since there’s less information about these companies in general.” For investors, the increased tax return disclosure resulted in a small negative reaction that did not reverse itself after a few days.

Next, the authors looked at changes in corporate behavior after the disclosure requirement. They found evidence that some firms altered their reported income so that it fell below the threshold for disclosure. And they found that the disclosure did not result in more tax revenue for Australia, at least in the short-term.

The disclosure ignited a political movement towards tax reform.

Overall, the reactions to the new tax return disclosure were rather muted—it didn’t seem to make much of a difference one way or the other. The biggest effect, Robinson contends, was on Australian politics. “The disclosure ignited a political movement towards tax reform,” she said. The movement flowed from the incomplete tax data showing that certain companies paid no income tax, which led to public outcry and then a legislative response. After the media firestorm about firms not paying income taxes, several new tax reform bills were discussed within the Australian legislature.

This might have been the intended result. When the ATO released the tax return data, it also published a booklet explaining the data. So many people were confused by the numbers that the office kept adding to the booklet, and it grew from just a few pages to more than 30. In a later version of it, the ATO admits that the tax return disclosure data doesn’t contain the necessary context to make sense of a firm’s tax liability. In a word, Robinson’s opinion is that the data are “meaningless” with no real ability to interpret the data in any meaningful way. To date, more than 70 firms have committed to voluntarily disclose additional information to help stakeholders interpret the data released by the ATO.

“We speculate that, from the very beginning, the government wasn’t actually trying to provide useful information to anybody,” Robinson says. “They had a political agenda.”