IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/4213.html
   My bibliography  Save this paper

Keeping it off the Books: An Empirical Investigation of Firms that Engage in Tax Evasion

Author

Listed:
  • Tedds, Lindsay

Abstract

This paper uses a unique and recently available dataset that contains detailed information on firms from around the world to investigate factors that affect under-reporting behaviour by firms. The empirical strategy employed exploits the nature of the dependent variable, which is interval coded, and uses interval regression which provides an asymptotically more efficient estimator than the ordered probit, provided that the classical linear model assumptions hold. These assumptions are investigated using standard diagnostic tests that have been modified for the interval regression model. Evidence is presented that shows that firms in all regions around the world engage in under-reporting. Regression results indicate that government corruption has the single largest causal effect on under-reporting, resulting in the percentage of sales not reported to the tax authority being 53.4 percent higher. Taxes have the second single largest causal effect on under-reporting, resulting in the percentage of sales not reported to the tax authority being 20.2 percent higher. Access to financing, organized crime, political instability and the fairness of the legal system were found to have no effect on under-reporting. It is also found that there is a significant correlation between under-reporting and the legal organization of the business, size, age, ownership, competition and audit controls.

Suggested Citation

  • Tedds, Lindsay, 2007. "Keeping it off the Books: An Empirical Investigation of Firms that Engage in Tax Evasion," MPRA Paper 4213, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:4213
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/4213/1/MPRA_paper_4213.pdf
    File Function: original version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/39785/1/MPRA_paper_39785.pdf
    File Function: revised version
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March.
    2. Johnson, Simon & Kaufmann, Daniel & McMillan, John & Woodruff, Christopher, 2000. "Why do firms hide? Bribes and unofficial activity after communism," Journal of Public Economics, Elsevier, vol. 76(3), pages 495-520, June.
    3. Mark B. Stewart, 1983. "On Least Squares Estimation when the Dependent Variable is Grouped," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 737-753.
    4. Brian Erard & Chih-Chin Ho, 1999. "Searching for Ghosts: Who Are the Nonfilers nd How Much Tax Do They Owe?," Carleton Economic Papers 99-11, Carleton University, Department of Economics, revised Jul 2001.
    5. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 525-540.
    6. Apel,M., 1994. "An Expenditure-Based Estimate of Tax Evasion in Sweden," Papers 1, Uppsala - Working Paper Series.
    7. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
    8. Crocker, Keith J. & Slemrod, Joel, 2005. "Corporate tax evasion with agency costs," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1593-1610, September.
    9. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    10. Naomi E. Feldman & Joel Slemrod, 2007. "Estimating tax noncompliance with evidence from unaudited tax returns," Economic Journal, Royal Economic Society, vol. 117(518), pages 327-352, March.
    11. Cremer, H. & Marchand, M. & Pestieau, P., 1990. "Evading, auditing and taxing : The equity-compliance tradeoff," Journal of Public Economics, Elsevier, vol. 43(1), pages 67-92, October.
    12. Joel Slemrod & Shlomo Yitzhaki, 1996. "The Costs of Taxation and the Marginal Efficiency Cost of Funds," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 172-198, March.
    13. Andreoni, James, 1992. "IRS as loan shark tax compliance with borrowing constraints," Journal of Public Economics, Elsevier, vol. 49(1), pages 35-46, October.
    14. Erard, Brian & Ho, Chih-Chin, 2001. "Searching for ghosts: who are the nonfilers and how much tax do they owe?," Journal of Public Economics, Elsevier, vol. 81(1), pages 25-50, July.
    15. Per Engstrom & Bertil Holmlund, 2009. "Tax evasion and self-employment in a high-tax country: evidence from Sweden," Applied Economics, Taylor & Francis Journals, vol. 41(19), pages 2419-2430.
    16. Harvey, A C, 1976. "Estimating Regression Models with Multiplicative Heteroscedasticity," Econometrica, Econometric Society, vol. 44(3), pages 461-465, May.
    17. Roberto Dell’Anno & Miguel Gómez-Antonio & Angel Alañon-Pardo, 2007. "The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach," Empirical Economics, Springer, vol. 33(1), pages 197-197, July.
    18. Orme, Chris, 1990. "The small-sample performance of the information-matrix test," Journal of Econometrics, Elsevier, vol. 46(3), pages 309-331, December.
    19. Joulfaian, David & Rider, Mark, 1998. "Differential Taxation and TaxEvasion by Small Business," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(4), pages 676-687, December.
    20. Joulfaian, David & Rider, Mark, 1998. "Differential Taxation and TaxEvasion by Small Business," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 676-87, December.
    21. David Joulfaian, 2000. "Corporate Income Tax Evasion and Managerial Preferences," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 698-701, November.
    22. 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.
    23. Pissarides, Christopher A. & Weber, Guglielmo, 1989. "An expenditure-based estimate of Britain's black economy," Journal of Public Economics, Elsevier, vol. 39(1), pages 17-32, June.
    24. Scotchmer, Suzanne, 1987. "Audit Classes and Tax Enforcement Policy," American Economic Review, American Economic Association, vol. 77(2), pages 229-233, May.
    25. Watson, Harry, 1985. "Tax evasion and labor markets," Journal of Public Economics, Elsevier, vol. 27(2), pages 231-246, July.
    26. Geeta Batra & Daniel Kaufmann & Andrew H. W. Stone, 2003. "Investment Climate Around the World : Voices of the Firms from the World Business Environment Survey," World Bank Publications, The World Bank, number 15143, June.
    27. Per Engstrom & Bertil Holmlund, 2009. "Tax evasion and self-employment in a high-tax country: evidence from Sweden," Applied Economics, Taylor & Francis Journals, vol. 41(19), pages 2419-2430.
    28. Trandel, Greg & Snow, Arthur, 1999. "Progressive income taxation and the underground economy," Economics Letters, Elsevier, vol. 62(2), pages 217-222, February.
    29. Tedds, Lindsay, 2005. "The Underground Economy in Canada," MPRA Paper 4229, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Baumann Florian & Friehe Tim, 2016. "Competitive Pressure and Corporate Crime," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 647-687, April.
    2. Akhtar, Shumi & Akhtar, Farida & John, Kose & Wong, Su-Wen, 2019. "Multinationals' tax evasion: A financial and governance perspective," Journal of Corporate Finance, Elsevier, vol. 57(C), pages 35-62.
    3. Colin C. Williams, 2014. "Confronting the Shadow Economy," Books, Edward Elgar Publishing, number 15370.
    4. Joseph Mawejje & Ibrahim Mike Okumu, 2016. "Tax Evasion and the Business Environment in Uganda," South African Journal of Economics, Economic Society of South Africa, vol. 84(3), pages 440-460, September.
    5. Gokalp, Omer N. & Lee, Seung-Hyun & Peng, Mike W., 2017. "Competition and corporate tax evasion: An institution-based view," Journal of World Business, Elsevier, vol. 52(2), pages 258-269.
    6. Florencia Verónica Pedroni & Anahí Briozzo & Gabriela Pesce, 2019. "¿Por qué no declarar todo? Determinantes de la subfacturación empresarial en la Argentina," Asociación Argentina de Economía Política: Working Papers 4186, Asociación Argentina de Economía Política.
    7. Colin C. Williams & Friedrich Schneider, 2016. "Measuring the Global Shadow Economy," Books, Edward Elgar Publishing, number 16551.

    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. Lindsay M. Tedds, 2005. "Keeping It Off The Books: An Empirical Investigation Into the Characteristics of Firms That Engage In Tax Non-Compliance," Department of Economics Working Papers 2005-01, McMaster University.
    2. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.),Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470, Elsevier.
    3. Compton, Ryan & Nicholls, Christopher C. & Sandler, Daniel & Tedds, Lindsay, 2011. "Quantifying the Personal Income Tax Benefits of Backdating: A Canada - US Comparison," MPRA Paper 39789, University Library of Munich, Germany.
    4. Kalina Koleva, 2005. "A la recherche de l'administration fiscale optimale : l'approche par les coûts d'efficience," Cahiers de la Maison des Sciences Economiques r05050, Université Panthéon-Sorbonne (Paris 1).
    5. Eduardo Zilberman, 2016. "Audits or Distortions: The Optimal Scheme to Enforce Self-Employment Income Taxes," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(4), pages 511-544, August.
    6. Tan, Fangfang & Yim, Andrew, 2014. "Can strategic uncertainty help deter tax evasion? An experiment on auditing rules," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 161-174.
    7. James Alm, 2019. "What Motivates Tax Compliance?," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 353-388, April.
    8. James, Simon & Edwards, Alison, 2010. "An annotated bibliography of tax compliance and tax compliance costs," MPRA Paper 26106, University Library of Munich, Germany.
    9. Kalina Koleva, 2005. "A la recherche de l'administration fiscale optimale : l'approche par les coûts d'efficience," Post-Print halshs-00195354, HAL.
    10. Slemrod, Joel, 2004. "The Economics of Corporate Tax Selfishness," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(4), pages 877-899, December.
    11. Andrew Yim, 2009. "Efficient Committed Budget for Implementing Target Audit Probability for Many Inspectees," Management Science, INFORMS, vol. 55(12), pages 2000-2018, December.
    12. Randall K. Filer & Jan Hanousek & Tomáš Lichard & Karine Torosyan, 2019. "‘Flattening’ tax evasion? : Evidence from the post‐communist natural experiment," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 27(1), pages 223-246, January.
    13. Eduardo Engel & James R. Hines Jr., 1998. "Understanding Tax Evasion Dynamics," Documentos de Trabajo 47, Centro de Economía Aplicada, Universidad de Chile.
    14. Jordi Caballé & Judith Panadés, 2005. "Cost Uncertainty and Taxpayer Compliance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(3), pages 239-263, May.
    15. Kristoffer Berg & Thor O. Thoresen, 2020. "Problematic response margins in the estimation of the elasticity of taxable income," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 721-752, June.
    16. Simon Halphen Boserup & Jori Veng Pinje, 2010. "Tax Evasion, Information Reporting, and the Regressive Bias Hypothesis," EPRU Working Paper Series 2010-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    17. DeBacker, Jason & Heim, Bradley T. & Tran, Anh, 2015. "Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States," Journal of Financial Economics, Elsevier, vol. 117(1), pages 122-138.
    18. Odd E Nygård & Joel Slemrod & Thor O Thoresen, 2019. "Distributional Implications of Joint Tax Evasion," Economic Journal, Royal Economic Society, vol. 129(620), pages 1894-1923.
    19. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
    20. Inés Macho Stadler & David Perez-Castrillo, 2005. "Optimal inspection policy and income-tax compliance," Hacienda Pública Española / Review of Public Economics, IEF, vol. 173(2), pages 9-45, June.

    More about this item

    Keywords

    Underground Economy; Tax Non-compliance; Firm Characteristics; Interval Regression;

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

    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:pra:mprapa:4213. 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: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.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.