•Corruption and firm tax evasion can become intertwined and self-reinforcing.•This paper examines how the potential for bribery affects firm tax evasion.•We use firm-level information on reporting ...obtained from the World Bank.•We find that bribery results in a reduction of sales reported for taxes.•These results indicate that it is corruption that largely drives evasion.
Although corruption and tax evasion are distinct and separate problems, they can easily become intertwined and reinforcing. A society that is more corrupt may enable more tax evasion as corrupt officials seek more income via bribes; conversely, higher levels of tax evasion may drive corruption by offering more opportunities for bribes. While a large body of work on each subject separately has emerged, the relationship between the two problems has remained a largely unexplored area. This paper focuses on how the potential for bribery of tax officials affects a firm's tax evasion decisions. To test how the potential for bribery affects a firm's tax reporting decisions, we use firm-level information on reporting obtained from the World Enterprise Survey and the Business Environment and Enterprise Performance Survey. Our basic estimation approach uses instrumental variables methods to control for the potential endogeneity of evasion and corruption. We also use propensity score matching methods as a robustness check. Our results show that it is corruption that largely drives higher levels of evasion; that is, corruption of tax officials is a statistically and economically significant determinant of tax evasion. The presence of tax inspectors who request bribes results in a reduction of sales reported for taxes of between 4 and 10 percentage points. Additionally, larger bribes result in higher levels of evasion. Overall these results indicate that governments seeking to decrease tax evasion – and so increase tax revenues – must work first to ensure an honest tax administration.
This article presents evidence that loss aversion affects taxpayers as they file their annual tax returns, and presents a framework for estimating the policy impact of this psychological phenomenon. ...In my theoretical framework, taxpayers manipulate the money paid to the tax authority through avoidance and evasion activities. When taxpayers face the prospect of owing the tax authority money on tax day, loss aversion generates the perception of a greater marginal utility of tax reduction and therefore motivates greater pursuit of tax reduction activities. Applying a bunching-based identification strategy to U.S. tax return data, I estimate that taxpayers facing a payment on tax day reduce their tax liability by $34 more than taxpayers owed a refund.
Using a large sample of U.S. firms for the period 1995–2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. ...This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.
Reducing tax evasion is a priority for many governments. A growing literature argues that verifying taxpayer reports against third-party information is critical for tax collection. However, ...effectiveness can be limited when tax authorities face constraints to credible enforcement and taxpayers make offsetting adjustments on other margins. We exploit a policy intervention in which Ecuadorian firms were notified about detected revenue discrepancies. Most firms simply failed to respond. Firms that responded increased reported revenue, matching the discrepancy amount when provided. However, they also increased reported costs by 96 cents per dollar of revenue adjustment, resulting in minor increases in tax collection.
Many countries apply lower fines to tax evading individuals when they voluntarily disclose the tax evasion they committed. I model such voluntary disclosure mechanisms theoretically and show that ...while such mechanisms increase the incentive to evade taxes, they nevertheless increase tax revenues net of administrative costs. I confirm the importance of administrative costs in a survey of German competent local tax authorities. I then test the effects of voluntary disclosure on the tax evasion decision, using the introduction of the 2009 offshore voluntary disclosure program in the U.S. for identification. The analysis confirms that the introduction of voluntary disclosure increases tax evasion.
This study identifies factors that may have influenced the degree of aggregate federal personal income tax evasion in the U.S. An established tax evasion model is updated to include the most recent ...data available and augmented with the addition of heretofore neglected or overlooked explanatory variables. To measure the degree of aggregate tax evasion behaviour, we adopt the percentage of personal taxable income that was unreported to the IRS by using official time series data for the years 1980 through 2016. We incorporate previously resilient variables such as the federal tax rate, the unemployment rate, the audit rate of filed returns by IRS personnel, the penalty interest rate on detected tax evasion, and a measure of real income growth into our study. Each has a statistically significant impact on the degree of aggregate federal personal income tax evasion, consistent with prior literature. As an extension of the literature, we find compelling evidence that age, gender, the average effective state income tax rate, and the percentages of federal personal income tax returns that include Schedule C and/or Schedule A are additional variables that have been largely ignored in previous related studies but appear to have impacted tax evasion behaviour.
We study optimal public expenditure and tax enforcement in a simple one-sector, dynamic endogenous growth model where agents optimize consumption and evasion; evasion is costly, while public ...expenditure increases private capital productivity. We show that tax evasion costs and the efficiency of endogenous audits play a crucial role in determining the relationship between tax evasion, tax rates, public expenditure, and growth. The key elements to improve tax enforcement are efficiency in the audit process and increased productivity in public expenditure. Increasing tax evasion costs could reduce tax evasion, but when tax enforcement is inefficient, this might trigger a perverse effect in which a tax rate increase reduces tax revenue. This finding implies that government spending depends on the efficiency of the audit process: expanding government expenditure optimally or increasing private productivity is impossible without improvements in tax compliance.
•We study optimal tax and audit policies in a model with tax evasion.•Tax evasion-related costs and audit efficiency are keys to a successful tax policy.•High noncompliance costs in an inefficient public sector cause a Laffer curve effect.•By reducing public productive input, tax evasion becomes self-reinforcing.•Investing in the efficiency of audits and public spending reduces tax evasion.
SOCIAL NORMS AND THE ENFORCEMENT OF LAWS Acemoglu, Daron; Jackson, Matthew O.
Journal of the European Economic Association,
04/2017, Volume:
15, Issue:
2
Journal Article
Peer reviewed
We examine the interplay between social norms and the enforcement of laws. Agents choose a behavior (e.g., tax evasion, production of low-quality products, corruption, harassing behavior, substance ...abuse, etc.) and then are randomly matched with another agent. There are complementarities in behaviors so that an agent’s payoff decreases with the mismatch between her behavior and her partner’s, and with overall negative externalities created by the behavior of others. A law is an upper bound (cap) on behavior. A law-breaker, when detected, pays a fine and has her behavior forced down to the level of the law. Equilibrium law-breaking depends on social norms because detection relies, at least in part, on whistle-blowing. Law-abiding agents have an incentive to whistle-blow on a law-breaking partner because this reduces the mismatch with their partners’ behaviors as well as the negative externalities. When laws are in conflict with norms and many agents are breaking the law, each agent anticipates little whistle-blowing and is more likely to also break the law. Tighter laws (banning more behaviors), greater fines, and better public enforcement, all have counteracting effects, reducing behavior among law-abiding individuals but increasing it among law-breakers. We show that laws that are in strong conflict with prevailing social norms may backfire, whereas gradual tightening of laws can be more effective in influencing social norms and behavior.
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