Cautionary tales: How the tax office benefits from celebrity tax evaders

2019-01-28

Tax authorities obviously gain when they detect tax evasion and collect taxes due, be it from celebrities or ordinary citizens. However, pursuing prominent tax evaders also has an indirect – potentially even larger – effect on tax revenues.

The reason is that media outlets are usually quite eager to report about celebrities with tax problems. Recent examples include football stars Cristiano Ronaldo and Lionel Messi, politicians Silvio Berlusconi and Yulia Tymoshenko, or singers Shakira and Marc Anthony. A newly published study shows that this kind of media coverage increases the compliance of ordinary tax payers, especially when celebrities have to stand trial for tax evasion. For example, photos of a celebrity being brought into court in handcuffs or pictures of a prison cell are powerful images that catch the attention of the public.

The aforementioned study analyzed reports about celebrity tax evaders, published by 60 German regional and national newspapers between 2010 and 2016. The authors linked this information to data on participation in Germany’s tax amnesty program: Under certain conditions, tax evaders have the possibility to come clean in exchange for impunity. The study shows that the amount of these self-denunciations increases when (and where) newspapers cover court trials involving prominent tax evaders.

The size of the effect is substantial: News coverage in the amount of an average trial increases the quarterly number of self-denunciations by 23%. Thus celebrity trials can be cautionary tales for other unlawful citizens. Using a phrase that guides the activities at JIBS, the news coverage animates tax payers to be more “responsible in action”.

In the language of economists, the study “identifies” the causal effect of the news coverage by using a so-called instrumental-variable approach. This approach allows to mimic the conditions of randomized controlled experiments, but outside the laboratory.

The way courts, authorities, and the press handle prominent delinquents can be crucial for the actions of ordinary citizens. On the one hand, celebrities should not be granted a bonus when they are pursued; or else, tax evasion might be encouraged. On the other hand, the authorities should resist penalizing prominent tax evaders more severely than other citizens, as democratic societies rely on the equal treatment of their constituents.

Links to the study

https://www.sciencedirect.com/science/article/pii/S0167268118302439(published version)

https://www.marcelgarz.com/wp-content/uploads/Self-denunciations-Aug-2018.pdf(free access working paper version)