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Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion

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Author Info

  • Paul E. Carrillo

    ()
    (Department of Economics/Institute for International Economic Policy, George Washington University)

  • M. Shahe Emran

    ()
    (Department of Economics/Institute for International Economic Policy, George Washington University and IPD, Columbia University)

  • Anita Rivadeneira

    ()
    (Centro de Estudios Fiscales, Servicio de Rentas Internas – Ecuador)

Abstract

We 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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File URL: http://www.gwu.edu/~iiep/assets/docs/papers/Carrillo_IIEPWP2011-03.pdf
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Bibliographic Info

Paper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2011-03.

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Length: 39 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:gwi:wpaper:2011-03

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Related research

Keywords: Withholding; Reverse Withholding; Firms; Profit Tax; Bunching; Tax Evasion; Ecuador;

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References

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  1. Yitzhaki, Shlomo, 1974. "Income tax evasion: A theoretical analysis," Journal of Public Economics, Elsevier, vol. 3(2), pages 201-202, May.
  2. Robin Boadway & Motohiro Sato, 2009. "Optimal Tax Design and Enforcement with an Informal Sector," American Economic Journal: Economic Policy, American Economic Association, vol. 1(1), pages 1-27, February.
  3. M. Shahe Emran & Joseph E. Stiglitz, 2002. "On Selective Indirect Tax Reform in Developing Countries," International Trade 0210003, EconWPA.
  4. Onji, Kazuki, 2009. "The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 766-775, June.
  5. Sandmo, Agnar, 2005. "The Theory of Tax Evasion: A Retrospective View," National Tax Journal, National Tax Association, vol. 58(4), pages 643-63, December.
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Cited by:
  1. Dina Pomeranz, 2013. "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax," NBER Working Papers 19199, National Bureau of Economic Research, Inc.

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