The Intended and Unintended Deterrence Effects of Tax Whistleblower Laws: Evidence From New York’s FCA

Abstract

In this study, we provide evidence on the deterrence effects of state tax whistleblower laws. We exploit a novel 2010 amendment to New York’s False Claims Acts that explicitly extended whistleblower incentives to corporate income tax whistleblowers. We identify treated firms (firms exposed to New York’s FCA) using establishment-level data and descriptive analyses. Using a traditional difference-in-differences design, we find evidence that New York’s FCA reduced state tax avoidance, consistent with deterrence benefits. In cross-sectional tests, we find that effects are increasing in firms that grant fewer employee stock options and industry regulation, consistent with deterrence increasing in employee and regulator monitoring. We also find evidence that New York’s FCA deterred federal tax avoidance, consistent with positive vertical tax externalities. Next, we focus on particular tax strategies and find evidence of reduced probability of Double Irish tax structures, reduced relationships to tax planning banks, reduced use of special purpose vehicles and reduced outbound tax-motivated income shifting. Finally, we disentangle ex ante deterrence from ex post peer deterrence using hand-collected New York tax whistleblower press releases from the Attorney General. We find evidence of both types of deterrence. Overall, this study provides policy-relevant evidence on the deterrence benefits and externalities of tax whistleblower laws.

Keywords: State tax whistleblower protections, FCAs, deterrence effect, spillover effect, tax externalities, tax avoidance