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Keeping it off the Books: An Empirical Investigation of Firms that Engage in Tax Evasion

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Author Info
Tedds, Lindsay

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Abstract

This paper uses a unique and recently available dataset that contains detailed information on firms from around the world to investigate factors that affect under-reporting behaviour by firms. The empirical strategy employed exploits the nature of the dependent variable, which is interval coded, and uses interval regression which provides an asymptotically more efficient estimator than the ordered probit, provided that the classical linear model assumptions hold. These assumptions are investigated using standard diagnostic tests that have been modified for the interval regression model. Evidence is presented that shows that firms in all regions around the world engage in under-reporting. Regression results indicate that government corruption has the single largest causal effect on under-reporting, resulting in the percentage of sales not reported to the tax authority being 53.4 percent higher. Taxes have the second single largest causal effect on under-reporting, resulting in the percentage of sales not reported to the tax authority being 20.2 percent higher. Access to financing, organized crime, political instability and the fairness of the legal system were found to have no effect on under-reporting. It is also found that there is a significant correlation between under-reporting and the legal organization of the business, size, age, ownership, competition and audit controls.

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File URL: http://mpra.ub.uni-muenchen.de/4213/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4213.

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Date of creation: Jul 2007
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Handle: RePEc:pra:mprapa:4213

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Related research
Keywords: Underground Economy Tax Non-compliance Firm Characteristics Interval Regression

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Find related papers by JEL classification:
C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior

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  7. Orme, Chris, 1990. "The small-sample performance of the information-matrix test," Journal of Econometrics, Elsevier, vol. 46(3), pages 309-331, December. [Downloadable!] (restricted)
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  17. Pissarides, Christopher A. & Weber, Guglielmo, 1989. "An expenditure-based estimate of Britain's black economy," Journal of Public Economics, Elsevier, vol. 39(1), pages 17-32, June. [Downloadable!] (restricted)
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  19. Tedds, Lindsay, 2007. "Estimating the Income Reporting Function for the Self-Employed," MPRA Paper 4212, University Library of Munich, Germany. [Downloadable!]
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