An Examination of Firms' Responses to Tax Forgiveness

Abstract

This study uses state tax amnesties to examine how firms respond to forgiveness — particularly repeated forgiveness — by a taxing authority. We posit that tax forgiveness programs alter taxpayer perceptions of the probability of detection by enforcers or the probability of future forgiveness programs, either of which could affect future tax avoidance. We find that firms headquartered in an amnesty-granting state increase income tax avoidance following the first instance of tax amnesty, relative to control firms in other states. Moreover, we find evidence that tax avoidance relatively increases with each additional repetition of a tax amnesty. Finally, we find that the effect of amnesties on tax avoidance is more prominent for small firms. Our findings suggest that repeated programs of tax forgiveness have increasingly negative implications for corporate tax collections.

Keywords: tax amnesty, tax enforcement

JEL Classification: H25, H26