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

• In Event: Penalties for Misreporting

Abstract

The US Tax Code allows defendants to treat punitive damages as a deductible expense. Legal scholars posit that jurors are unaware that punitive damages are tax-deductible. Consequently, they claim that defendants are penalized for lower amounts than they would be if jurors were instructed about tax-deductibility. We conduct an experiment to test this claim. We provide jurors with information about tax-deductibility and the defendant’s effective tax rate (ETR) to provide them some context to adjust their awards. We find that jurors who are explicitly instructed that punitive damages are tax-deductible award higher damages when the defendant’s ETR is low, but not when the defendant’s ETR is high. This result is surprising because defendants with a higher ETR are likely to benefit more from tax-deductibility compared to defendants with a lower ETR. Our results inform the debate on providing jurors with information about defendants’ tax situation.

Authors

• Bryan Church, Georgia Institute of Technology

• Lucien Dhooge, Georgia Institute of Technology

• Karie Davis-Nozemack, Georgia Institute of Technology

• Shankar Venkataraman, Bentley University