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University of Missouri

Render Unto Caesar

Tax break or tax loophole? It might depend on how religious your community is.

money cross

In the Bible, experts in Jewish law try to ensnare Jesus with a trick question about whether it’s lawful to pay taxes to a pagan government. He impresses them by saying the Roman coins with Caesar’s imprinted image should be paid to Caesar, but the things that are God’s should be given to God.

That simple lesson in federal tax compliance still holds sway among Americans of all faiths, and it even extends to the businesses in their communities.

“Do social norms in terms of your affiliation with your religion affect economic behavior?” wondered Inder Khurana, KPMG and Joseph A. Silvoso Distinguished Professor of Accountancy. “We were really pleased when we saw they did.”

Khurana used county-level data on religious adherence rates, aggregate Internal Revenue Service data on individual tax payments, and U.S. Securities and Exchange Commission corporate filings to show that effective corporate and personal tax rates are higher in strongly religious communities than in less religious ones.

His findings, with coauthors Jeff Boone and K.K. Raman from the University of Texas at San Antonio, were published in the Spring 2013 Journal of the American Taxation Association.

Tax avoidance in this context is not tax cheating, Khurana points out. It’s the aggressive use of tax laws to limit the amount owed — a gray area with greater risk of audits, penalties and public embarrassment.

Khurana’s work holds important lessons for research as to why some corporations avoid taxes more than others. Previous studies focused on the characteristics of the companies — were they profitable, did they have large foreign operations, etc. — “But corporations are managed by individuals,” Khurana says. “They never explained what about those individuals causes them to engage in that behavior.”

Khurana says he wants to move his research to the international scale and see how cultural differences affect tax and regulatory compliance, especially in light of efforts to implement global accounting standards.

“I’m really starting to believe that culture does matter,” he says.