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Re-Examining the Neutrality of Profit Taxation and the Separability between Evasion and the Production Decisions of Firms

Author

Listed:
  • Che-Chiang Huang

    (Department of Public Finance and Taxation, China University of Technology, Taiwan)

  • Horn-In Kuo

    (Department of International Business, Ming Chuan University, Taiwan)

Abstract

It is a very robust conventional view that profit taxation has no impact on the output level even in the presence of evasion with a random audit scheme. In addition, the firms' evasion and production decisions are separable as well. In this note we show that if the firm evades tax via underreporting quantities sold and the output level is essential to the audited profit of the tax authority, the profit tax is non-neutral and the separability between production and evasion decisions no longer holds. Otherwise, the traditional view is still robust.

Suggested Citation

  • Che-Chiang Huang & Horn-In Kuo, 2014. "Re-Examining the Neutrality of Profit Taxation and the Separability between Evasion and the Production Decisions of Firms," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 10(1), pages 91-100, January.
    • Handle: RePEc:jec:journl:v:10:y:2014:i:1:p:91-100
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    More about this item

    Keywords

    profit tax; tax neutrality; tax evasion; random audit scheme;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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