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Tax Evasion and Competition

  • Laszlo Goerke
  • Marco Runkel

Using a Cournot oligopoly model with an endogenous number of firms and evasion of indirect taxes, this paper shows that more intense competition may have the negative side-effect of eroding tax revenues by increasing tax evasion. This will be the case if market entry costs decrease. A similar result will hold if marginal production costs fall and demand is either weakly concave or convex and inelastic. The desirable result of more competition, less evasion and higher tax revenues will be obtained if (a) marginal production costs fall and demand is convex and elastic or (b) the demand elasticity increases.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-09/cesifo1_wp2104.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2104.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2104
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  1. Simeon Djankov & Rafael La Porta & Florencio LopezdeSilanes & Andrei Shleifer, 2000. "The Regulation of Entry," NBER Working Papers 7892, National Bureau of Economic Research, Inc.
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  8. Cremer, Helmuth & Gahvari, Firouz, 1992. "Tax Evasion and the Structure of Indirect Taxes and Audit Probabilities," Public Finance = Finances publiques, , vol. 47(Supplemen), pages 351-65.
  9. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
  10. Ralph Bayer & Frank A Cowell, 2006. "Tax Compliance and Firms’ StrategicInterdependence," STICERD - Distributional Analysis Research Programme Papers 81, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  17. Marrelli, Massimo, 1984. "On indirect tax evasion," Journal of Public Economics, Elsevier, vol. 25(1-2), pages 181-196, November.
  18. Axel Dreher, 2006. "Does globalization affect growth? Evidence from a new index of globalization," Applied Economics, Taylor & Francis Journals, vol. 38(10), pages 1091-1110.
  19. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 50(2), pages 261-275, February.
  20. Axel Dreher, 2002. "Does Globalization Affect Growth?," Development and Comp Systems 0210004, EconWPA, revised 04 Feb 2003.
  21. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  22. Andrei Shleifer, 2004. "Does Competition Destroy Ethical Behavior?," American Economic Review, American Economic Association, vol. 94(2), pages 414-418, May.
  23. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  24. Leonard F.S. Wang, 1990. "Tax Evasion and Monopoly Output Decisions with Endogenous Probability of Detection," Public Finance Review, , vol. 18(4), pages 480-487, October.
  25. Helmuth Cremer & Firouz Gahvari, 1999. "Excise Tax Evasion, Tax Revenue, and Welfare," Public Finance Review, , vol. 27(1), pages 77-95, January.
  26. Stephen Smith & Michael Keen, 2007. "VAT Fraud and Evasion; What Do We Know, and What Can be Done?," IMF Working Papers 07/31, International Monetary Fund.
  27. Wang, Leonard F.S. & Conant, John L., 1988. "Corporate Tax Evasion and Output Decisions of the Uncertain Monopolist," National Tax Journal, National Tax Association, vol. 41(4), pages 579-81, December.
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