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Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion

Author

Listed:
  • Paul E. Carrillo

    (Department of Economics/Institute for International Economic Policy, George Washington University)

  • M. Shahe Emran

    (Department of Economics/Institute for International Economic Policy, George Washington University and IPD, Columbia University)

  • Anita Rivadeneira

    (Centro de Estudios Fiscales, Servicio de Rentas Internas Ecuador)

Abstract

We use firm-level administrative data from Ecuador to study the implications of 'reverse withholding' for firms' tax behavior. Withholding does not affect tax liability of firms, but it may result in a discontinuity in the audit probability around the withholding threshold. Exploiting variation in withholding rates across industries and over time, we find that firms' profit taxes concentrate near the withholding rate. To explore the link between bunching and evasion, we use data from third party reports on sales and costs. We show that the firms that bunch are more likely to conceal their sales and inflate their costs. Finally, we create a profile of the firms that bunch and of their general managers: medium size firms in the coastal region headed by single males are significantly more likely to bunch and, presumably, to evade taxes.

Suggested Citation

  • Paul E. Carrillo & M. Shahe Emran & Anita Rivadeneira, 2011. "Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion," Working Papers 2011-03, The George Washington University, Institute for International Economic Policy.
    • Handle: RePEc:gwi:wpaper:2011-03
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    References listed on IDEAS

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    5. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484, December.
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    Cited by:

    1. Asatryan, Zareh & Peichl, Andreas, 2016. "Responses of firms to tax, administrative and accounting rules: Evidence from Armenia," ZEW Discussion Papers 16-065, ZEW - Leibniz Centre for European Economic Research.
    2. Lisa De Simone & Rebecca Lester & Kevin Markle, 2020. "Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)," Journal of Accounting Research, Wiley Blackwell, vol. 58(1), pages 105-153, March.
    3. Cyril Chalendard, 2016. "Shifting-Profits through Tax Loopholes. Evidence from Ecuador," CESifo Working Paper Series 6240, CESifo.
    4. Carrillo, Paul & Emran, M. Shahe, 2018. "Loss Aversion, Transaction Costs, or Audit Trigger? Learning about Corporate Tax Compliance from a Policy Experiment with Withholding Regime," MPRA Paper 87445, University Library of Munich, Germany.
    5. Dina Pomeranz, 2015. "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax," American Economic Review, American Economic Association, vol. 105(8), pages 2539-2569, August.

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    More about this item

    Keywords

    Withholding; Reverse Withholding; Firms; Profit Tax; Bunching; Tax Evasion; Ecuador;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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