IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_8034.html
   My bibliography  Save this paper

Sham Litigation, Delayed Tax Payment and Evasion: The Role of Informal Credit Market

Author

Listed:
  • Sugata Marjit
  • Suryaprakash Mishra
  • Sandip Mitra

Abstract

We model the interaction between the informal credit market and the act of tax collection by the government; in presence and functioning of the informal credit market, the agents (the tax paying firms) engage in false or sham litigation and deferred tax payments. During the litigation period they earn higher return, higher than the punishment rates charged by the government. Proportion of false claims increases with size. In this context we get a result that contradicts conventional wisdom in tax evasion literature whereby higher tax rate actually leads to greater compliance and tax rate acts as a policy instrument even when in the standard case it does not affect evasion. We propose part-payment of the disputed amount by the tax paying firm to the government as a possible solution to the problems of excessive litigation against the government, delayed tax payments and evasion; it also has a positive impact on the tax collection of the government. Finally, we also attempt to explain as to why and how the government policies may be intentionally designed to foster the informal sector.

Suggested Citation

  • Sugata Marjit & Suryaprakash Mishra & Sandip Mitra, 2019. "Sham Litigation, Delayed Tax Payment and Evasion: The Role of Informal Credit Market," CESifo Working Paper Series 8034, CESifo.
  • Handle: RePEc:ces:ceswps:_8034
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp8034.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Blackburn, Keith & Bose, Niloy & Capasso, Salvatore, 2012. "Tax evasion, the underground economy and financial development," Journal of Economic Behavior & Organization, Elsevier, vol. 83(2), pages 243-253.
    2. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    3. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, June.
    4. Benjamin A. Olken & Rohini Pande, 2012. "Corruption in Developing Countries," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 479-509, July.
    5. Capasso, Salvatore & Jappelli, Tullio, 2013. "Financial development and the underground economy," Journal of Development Economics, Elsevier, vol. 101(C), pages 167-178.
    6. 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.
    7. Keen, Michael & Slemrod, Joel, 2017. "Optimal tax administration," Journal of Public Economics, Elsevier, vol. 152(C), pages 133-142.
    8. Keen, Michael & Slemrod, Joel, 2017. "Optimal tax administration," Journal of Public Economics, Elsevier, vol. 152(C), pages 133-142.
    9. Vito Tanzi & Hamid R Davoodi, 2000. "Corruption, Growth, and Public Finances," IMF Working Papers 00/182, International Monetary Fund.
    10. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
    11. Sugata Marjit & André Seidel & Marcel Thum, 2017. "Tax Evasion, Corruption and Tax Loopholes," German Economic Review, Verein für Socialpolitik, vol. 18(3), pages 283-301, August.
    12. Kenyon, Thomas, 2008. "Tax Evasion, Disclosure, and Participation in Financial Markets: Evidence from Brazilian Firms," World Development, Elsevier, vol. 36(11), pages 2512-2525, November.
    13. Marjit, Sugata & Mukherjee, Vivekananda & Mukherjee, Arijit, 2000. "Harassment, corruption and tax policy," European Journal of Political Economy, Elsevier, vol. 16(1), pages 75-94, March.
    14. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
    15. Dhami, Sanjit & al-Nowaihi, Ali, 2007. "Why do people pay taxes? Prospect theory versus expected utility theory," Journal of Economic Behavior & Organization, Elsevier, vol. 64(1), pages 171-192, September.
    16. Marjit, Sugata & Rajeev, Meenakshi & Mukherjee, Diganta, 2000. "Incomplete information as a deterrent to crime," European Journal of Political Economy, Elsevier, vol. 16(4), pages 763-773, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James Alm, 2019. "What Motivates Tax Compliance?," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 353-388, April.
    2. Timothy Besley & Torsten Persson, 2011. "Pillars of Prosperity: The Political Economics of Development Clusters," Economics Books, Princeton University Press, edition 1, number 9624, October.
    3. Guo, Jang-Ting & Hung, Fu-Sheng, 2020. "Tax evasion and financial development under asymmetric information in credit markets," Journal of Development Economics, Elsevier, vol. 145(C).
    4. Matthias Kasper & James Alm, 2020. "Audits, Audit Effectiveness, and Post-audit Tax Compliance," Working Papers 2010, Tulane University, Department of Economics.
    5. Shafik Hebous & Zhiyang Jia & Knut Løyland & Thor Olav Thoresen & Arnstein Øvrum, 2020. "Do Audits Improve Future Tax Compliance in the Absence of Penalties? Evidence from Random Audits in Norway," CESifo Working Paper Series 8480, CESifo.
    6. Eicher, Theo S. & Schreiber, Till, 2010. "Structural policies and growth: Time series evidence from a natural experiment," Journal of Development Economics, Elsevier, vol. 91(1), pages 169-179, January.
    7. Steven N. Durlauf & Andros Kourtellos & Chih Ming Tan, 2012. "Is God in the details? A reexamination of the role of religion in economic growth," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(7), pages 1059-1075, November.
    8. Una Okonkwo Osili & Anna L. Paulson, 2006. "What can we learn about financial access from U.S. immigrants?," Working Paper Series WP-06-25, Federal Reserve Bank of Chicago.
    9. Knack, Steve & Xu, Lixin Colin, 2017. "Unbundling institutions for external finance: Worldwide firm-level evidence," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 215-232.
    10. Hashimzade, Nigar & Myles, Gareth D. & Rablen, Matthew D., 2016. "Predictive analytics and the targeting of audits," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 130-145.
    11. Kerekes, Carrie B. & Williamson, Claudia R., 2008. "Unveiling de Soto's mystery: property rights, capital formation, and development," Journal of Institutional Economics, Cambridge University Press, vol. 4(3), pages 299-325, December.
    12. Theo S. Eicher & Andreas Leukert, 2009. "Institutions and Economic Performance: Endogeneity and Parameter Heterogeneity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 197-219, February.
    13. Rok Spruk & Mitja Kovac, 2018. "Inefficient Growth," Review of Economics and Institutions, Università di Perugia, vol. 9(2).
    14. John W. Dawson, 2007. "The Empirical Institutions-Growth Literature: Is Something Amiss at the Top?," Econ Journal Watch, Econ Journal Watch, vol. 4(2), pages 184-196, May.
    15. Rigobon, Roberto & Rodrik, Dani, 2004. "Rule of Law, Democracy, Openness and Income: Estimating the Interrelationships," CEPR Discussion Papers 4653, C.E.P.R. Discussion Papers.
    16. Gil S. Epstein & Ira N. Gang, 2019. "Inequality, good governance, and endemic corruption," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(5), pages 999-1017, October.
    17. Sambit Bhattacharyya & Steve Dowrick & Jane Golley, 2009. "Institutions and Trade: Competitors or Complements in Economic Development?," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 318-330, September.
    18. Giovanni, Domenico De & Lamantia, Fabio & Pezzino, Mario, 2019. "A behavioral model of evolutionary dynamics and optimal regulation of tax evasion," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 79-89.
    19. Douglas A. Irwin, 2020. "Adam Smith's “tolerable administration of justice” and the Wealth of Nations," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(3), pages 231-247, July.
    20. Rok Spruk & Aleskandar Kešeljević, 2016. "Institutional Origins of Subjective Well-Being: Estimating the Effects of Economic Freedom on National Happiness," Journal of Happiness Studies, Springer, vol. 17(2), pages 659-712, April.

    More about this item

    Keywords

    delayed tax payment; evasion; sham litigation; informal credit market;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_8034. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe). General contact details of provider: http://edirc.repec.org/data/cesifde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.