Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion
AbstractWe use firm-level administrative data from Ecuador to study the implications of 'reverse withholding' for firms' tax behavior. Withholding does not affect tax liability of firms, but it may result in a discontinuity in the audit probability around the withholding threshold. Exploiting variation in withholding rates across industries and over time, we find that firms' profit taxes concentrate near the withholding rate. To explore the link between bunching and evasion, we use data from third party reports on sales and costs. We show that the firms that bunch are more likely to conceal their sales and inflate their costs. Finally, we create a profile of the firms that bunch and of their general managers: medium size firms in the coastal region headed by single males are significantly more likely to bunch and, presumably, to evade taxes.
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Bibliographic InfoPaper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2011-03.
Length: 39 pages
Date of creation: Mar 2011
Date of revision:
Withholding; Reverse Withholding; Firms; Profit Tax; Bunching; Tax Evasion; Ecuador;
Find related papers by JEL classification:
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-10-09 (Accounting & Auditing)
- NEP-ALL-2011-10-09 (All new papers)
- NEP-IUE-2011-10-09 (Informal & Underground Economics)
- NEP-PBE-2011-10-09 (Public Economics)
- NEP-PUB-2011-10-09 (Public Finance)
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