Munich Personal RePEc Archive

Does stigma against tax avoidance improve social welfare?

Hamamura, Jumpei and Kurita, Kenichi (2021): Does stigma against tax avoidance improve social welfare?

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Stigma can restrain tax avoidance. Tax avoidance behavior by multinational firms has become a public economics problem. Tax avoidance by firms may entail a kind of psychological cost, known as stigma. We analyze the impact of a multinational firm's profit shifting by multinational transfer pricing on social welfare using a simple model that assumes the existence of stigma. The results are as follows. First, stigma improves domestic social welfare more than the absence of stigma does. Second, stigma improves global social welfare more than the arm's length principle, which is the OECD consensus on transfer pricing of cross-border transactions. Third, the optimal degree of public exposure increases with the domestic tax rate and foreign market demand. Our study has the following implications. First, our results imply that stigma has implications for improving social welfare. Second, our results imply that regulators should eschew the arm's length principle and instead use stigma to improve the calibration of society as a whole by restricting the behavior of firms, which can cause problems in trade between nations. Third, in our study, because we find that choosing a positive degree of public exposure maximizes domestic social welfare, our results suggest that public exposure effectively stops the decline in social welfare caused by tax avoidance behavior in firms.

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