The Impact of Juror Knowledge of Deductibility and Defendants' Tax Rates on Punitive Damages Awards: Experimental Evidence

What is it about?

Under the Internal Revenue Code, punitive damages paid by defendants are tax-deductible. Jurors who are unaware of tax-deductibility award punitive damages for a particular amount believing that defendants will pay that amount, but defendants effectively pay a much lower amount after taxes. Some scholars characterize this as an under-punishment problem and propose that explicitly instructing jurors about tax-deductibility could mitigate this problem. We experimentally test this claim. We find that jurors who are explicitly informed that punitive damages are tax-deductible award higher damages when the defendant's effective tax rate (ETR) is low, but not when the defendant's ETR is high. This result provides only partial support for the under-punishment hypothesis. Our results inform the debate on providing jurors with more information about defendants' tax situation and shed light on the cost of tax avoidance (low ETR) in a novel setting.

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