Social Interaction and Tax Avoidance

University of Oslo
Principal Investigator: Wojciech Kopcuzk
We utilize the rich Norwegian administrative data to test the importance of social interactions for participation in tax avoidance and evasion. Avoidance or evasion by people in one's social network may lead to increased acceptance, reduced stigma, better information and lower transaction costs of implementing a tax avoidance strategy. For the universe of Norwegian shareholders, we identify four types of social networks: Family; Shareholder; Board; Accountant.

We first focus on a particular tax avoidance opportunity: setting up holding companies in the period preceding 2006 tax reform, in order to avoid or defer future capital gains and dividend taxation. Transition E rule allowed for a tax-free transfer of existing shares to newly set up holding companies during 2005 (E-firms), given that at least 10% of shares in a company are held by the holding company. We aim at presenting credible causal estimates of the effect of adoption elsewhere in the network on individual's own behavior. We here utilize the 10% rule that introduced a discontinuity on the ability for setting up an E-firm, and use this discontinuity to estimate the effect of the decision to pursue tax avoidance on individuals elsewhere in the social network.
The regression discontinuity design of this kind is one of the most convincing methods for establishing causality based on observational data, and is, to our knowledge, the first application of this kind in the context of social networks in general. In addition, we analyze the outcomes of participation in tax avoidance, both on individual and firm level.