The Effect of Government Transparency on Corporate Tax Avoidance: Evidence from State Freedom of Information Laws

This paper examines the effect of government transparency on corporate tax avoidance behavior using staggered changes in state-level freedom of information (FOI) laws to measure changes instate government transparency. Using a difference-in-differences design, we find that increased government transparency due to the FOI law improvement leads to less state tax avoidance by firms headquartered in the government’s jurisdiction and the effect is more pronounced for a stronger improvement. We find stronger results for firms that are more aggressive in state tax avoidance before the law change and firms with greater tax exposure in their headquarters states.We also find that federal tax avoidance increases following the FOI law improvement, while total tax avoidance does not change significantly, suggesting that firms substitute federal tax avoidance for state tax avoidance after the state FOI law improvement. Our state-level analysis suggests that the FOI law improvement leads to not only higher corporate income tax revenues, but also higher sales tax and individual income tax revenues