Effective corporate tax rates in the United States have been steadily declining over the past few decades as firms become more efficient at employing tax avoidance strategies. At the same time, altruistic activities have been increasing as firms engage in various socially responsible initiatives, including investing in their employee relations. This study provides an understanding of the relationship between these two, seemingly opposing, activities.
We use a quantitative approach to empirically measure and test the relationship between the constructs. Specifically, we obtain financial statement data to measure firms’ effective tax rates, consumer awareness, and other control variables from Compustat. The MSCI ESG dataset is utilized to measure CSR and, particularly, employee relations. Fortune Magazine’s “100 Best Companies to Work For” data are also used to proxy employee satisfaction.
We find that CSR and corporate tax avoidance (CTA) are negatively related in firms with high consumer awareness. For firms with low consumer awareness, the relation is either positive or insignificant. Further, we find that CTA and employee relations are positively related.
Our findings shed light on the determinants and consequences of CTA. The results lend credence to the risk-management view of CSR and demonstrate that consumer awareness acts as a behavioral intervention and governance mechanism to help mitigate corporate hypocrisy. Additionally, the findings demonstrate how CTA can be viewed as a predictor of a firm's employee relations.
Practical and social implications
The findings of our study help tax managers, public policymakers, regulators, tax authorities, and investors understand firms' considerations regarding tax avoidance, including their sensitivity to reputational cost risk, and highlights that employees are direct beneficiaries of CTA. It also explains why some companies do not avail themselves of tax avoidance strategies and pay the promulgated statutory rate or higher.
Extant theory and research on the direct relationship between the CSR and CTA provide mixed results and inconclusive evidence. We find that the relationship is moderated by consumer awareness. Further, we are, to the best of our knowledge, the first study to demonstrate a direct linkage between CTA and employee relations, confirmed by exploiting two independent measures of employee relations, and show that the two are positively related.
Corporate tax avoidance; corporate social responsibility; employee relations; corporate hypocrisy; consumer awareness; firm reputation.