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Is there a displacement deadweight loss from tax evasion? Estimates using firm surveys from the Czech Republic

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  • Jan Hanousek

    ()

  • Filip Palda

    ()

Abstract

In the presence of the underground economy taxes give rise to a deadweight loss from displacement of efficient producers by inefficient producers. We consider an economy in which a producer faces two types of costs: the cost of production, and taxes. If the ability to evade taxes is inversely proportional to the ability to keep production costs down, high tax rates may cause inefficient producers to crowd out efficient producers. We estimate this deadweight loss from surveys of 426 Czech firms taken in 2004 and 2005. We find that the deadweight loss due to this crowding out can be several times as large as the triangle deadweight losses from discouraged consumption. Our paper provides the first estimates ever of the displacement loss from tax evasion.
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Suggested Citation

  • Jan Hanousek & Filip Palda, 2009. "Is there a displacement deadweight loss from tax evasion? Estimates using firm surveys from the Czech Republic," Economic Change and Restructuring, Springer, vol. 42(3), pages 139-158, August.
  • Handle: RePEc:kap:ecopln:v:42:y:2009:i:3:p:139-158
    DOI: 10.1007/s10644-008-9056-2
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    References listed on IDEAS

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    1. Rosella Levaggi, 2007. "Tax Evasion and the Cost of Public Sector Activities," Public Finance Review, , vol. 35(5), pages 572-585, September.
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    6. Matz Dahlberg & Anders Forslund, 2005. "Direct Displacement Effects of Labour Market Programmes," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 475-494, September.
    7. Filip Palda, 2001. "A New Look at the Laffer Curve and the Displacement Loss from Tax Evasion," Public Economics 0111006, University Library of Munich, Germany.
    8. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October.
    9. Enrico D’Elia, 2005. "Using the results of qualitative surveys in quantitative analysis," ISAE Working Papers 56, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    10. Filip Palda, 1998. "Evasive Ability and the Efficiency Cost of the Underground Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1118-1138, November.
    11. Michela Nardo, 2003. "The Quantification of Qualitative Survey Data : A Critical Assessment," Journal of Economic Surveys, Wiley Blackwell, vol. 17(5), pages 645-668, December.
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    13. Dan Usher, 1982. "The Private Cost of Public Funds: Variations on Themes by Browning, Atkinson and Stern," Working Papers 481, Queen's University, Department of Economics.
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    Citations

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    Cited by:

    1. Anna Kochanova, 2012. "The Impact of Bribery on Firm Performance: Evidence from Central and Eastern European Countries," CERGE-EI Working Papers wp473, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. repec:kap:pubcho:v:174:y:2018:i:3:d:10.1007_s11127-018-0504-x is not listed on IDEAS
    3. Hanousek, Jan & Kochanova, Anna, 2015. "Bribery Environment and Firm Performance: Evidence from Central and Eastern European Countries," CEPR Discussion Papers 10499, C.E.P.R. Discussion Papers.
    4. Hanousek, Jan & Kochanova, Anna, 2016. "Bribery environments and firm performance: Evidence from CEE countries," European Journal of Political Economy, Elsevier, vol. 43(C), pages 14-28.

    More about this item

    Keywords

    Underground economy; Social cost of public funds; Taxation; Tax evasion; H26; H43; K42; O17;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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