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Tax Evasion, Investment, and Firm Activity

Author

Listed:
  • Florian Baumann
  • Tim Friehe

Abstract

This paper establishes within an intertemporal framework that firm activity is influenced by tax evasion if firms can invest in their long-term competitiveness. Higher investment raises the firm's survival probability, which in turn reduces tax-evasion payoffs, since evaded taxes may also be detected and penalized later on. At the same time, tax evasion in future periods increases future expected profits, making higher investment desirable. Consequently, tax evasion distorts investment, while the latter determines firm activity. Investment in the event of tax evasion may be higher or lower, depending on parameters of tax enforcement.

Suggested Citation

  • Florian Baumann & Tim Friehe, 2010. "Tax Evasion, Investment, and Firm Activity," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(1), pages 1-14, March.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201003)66:1_1:teiafa_2.0.tx_2-s
    DOI: 10.1628/001522108X503352
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    Citations

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    Cited by:

    1. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.
    2. James Alm & Yongzheng Liu & Kewei Zhang, 2019. "Financial constraints and firm tax evasion," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(1), pages 71-102, February.
    3. Wu T.C. Michael, 2016. "Profit Tax Evasion under Wage Bargaining Structure," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 16(2), pages 817-834, June.
    4. Tim Reuter, 2012. "Private antitrust enforcement revisited: The role of private incentives to report evidence to the antitrust authority," Working Paper Series of the Department of Economics, University of Konstanz 2012-04, Department of Economics, University of Konstanz.

    More about this item

    Keywords

    tax evasion; activity level; investment;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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