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Firm-oriented policies, tax cheating and perverse outcomes

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Author Info
Francesco Busato
Bruno Chiarini
Pasquale De Angelis
Elisabetta Marzano

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Abstract

This paper examines the implications of firm-oriented fiscal policies, namely investment subsidies and tax allowances, in an economy where producers may potentially avoid taxes. Among our results we stress the following. First, although investment subsidies induce increased capital accumulation (a level effect), they promote tax evasion; these subsidies induce firms to increase actual capital accumulation (a level effect), but also produce a reduction in the share of aggregate capital stock deployed in taxed, "official" production (a composition effect). Second, parameters characterizing the tax enforcement system play a major role in explaining tax evasion and firm size. Third, the technology structure matters for determining how to allocate resources between official and unofficial production.

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Publisher Info
Paper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Discussion Papers with number 10_2008.

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Date of creation: 31 Aug 2008
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Handle: RePEc:prt:dpaper:10_2008

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Related research
Keywords: State aid; tax exemptions; investment subsidies; tax evasion; unofficial underground production; investment;

Find related papers by JEL classification:
E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Abel, Andrew B., 1982. "Dynamic effects of permanent and temporary tax policies in a q model of investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 353-373. [Downloadable!] (restricted)
  2. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer, vol. 23(4), pages 831-861, May. [Downloadable!] (restricted)
  3. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1981-1), pages 67-140. [Downloadable!]
  4. Trandel, Greg & Snow, Arthur, 1999. "Progressive income taxation and the underground economy," Economics Letters, Elsevier, vol. 62(2), pages 217-222, February. [Downloadable!] (restricted)
  5. Bayer, Ralph-C., 2006. "A contest with the taxman - the impact of tax rates on tax evasion and wastefully invested resources," European Economic Review, Elsevier, vol. 50(5), pages 1071-1104, July. [Downloadable!] (restricted)
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  6. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June. [Downloadable!] (restricted)
  7. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier. [Downloadable!] (restricted)
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  8. Chiarini, Bruno & Marzano, Elisabetta & Schneider, Friedrich, 2008. "Tax Rates and Tax Evasion: An Empirical Analysis of the Structural Aspects and Long-Run Characteristics in Italy," IZA Discussion Papers 3447, Institute for the Study of Labor (IZA). [Downloadable!]
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  9. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November. [Downloadable!] (restricted)
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