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Dual Corporate Tax Evasion




Firms are subject to many forms of government regulation and laws. Two major sources of these regulations are corporate tax laws and labour or employment laws. For example, labour codes stipulate that firms must ensure their workplaces meet certain safety and health standards, and pay payroll taxes to cover the provision of government provided benefits to their workers, whereas corporate tax laws require firms to collect sales taxes on goods sold and pay taxes on their income or profits. There are many ways for firms to evade these legal requirements. Much of the literature examining the evasion behaviour of firms assumes that the decision to evade one form of regulation (such as labour regulation) is perfectly linked to the decision to evade another (such as paying business corporate taxes). In this paper, we separate these two evasion decisions and allow firms to decide whether to evade labour market regulations (including the payment of payroll taxes) independently from their decisions to evade corporate taxes. We characterize the firms’ optimal entry and evasion behaviour and derive the government's optimal tax policies.

Suggested Citation

  • Katherine Cuff & Steeve Mongrain & Joanne Roberts, 2016. "Dual Corporate Tax Evasion," Discussion Papers dp16-12, Department of Economics, Simon Fraser University.
  • Handle: RePEc:sfu:sfudps:dp16-12

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    References listed on IDEAS

    1. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
    2. Lipatov, Vilen, 2012. "Corporate tax evasion: The case for specialists," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 185-206.
    3. Áureo De Paula & José A. Scheinkman, 2011. "The Informal Sector: An Equilibrium Model And Some Empirical Evidence From Brazil," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57, pages 8-26, May.
    4. Michael Carlos Best & Anne Brockmeyer & Henrik Jacobsen Kleven & Johannes Spinnewijn & Mazhar Waseem, 2015. "Production versus Revenue Efficiency with Limited Tax Capacity: Theory and Evidence from Pakistan," Journal of Political Economy, University of Chicago Press, vol. 123(6), pages 1311-1355.
    5. Kong-Pin & C.Y. Cyrus Chu, 2005. "Internal Control versus External Manipulation: A Model of Corporate Income Tax Evasion," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 151-164, Spring.
    6. Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 119-128, March.
    7. Marrelli, M. & Martina, R., 1988. "Tax evasion and strategic behaviour of the firms," Journal of Public Economics, Elsevier, vol. 37(1), pages 55-69, October.
    8. Lambert Schoonbeek & Frans Vries, 2009. "Environmental taxes and industry monopolization," Journal of Regulatory Economics, Springer, vol. 36(1), pages 94-106, August.
    9. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January.
    10. Almeida, Rita & Carneiro, Pedro, 2006. "Enforcement of Regulation, Informal Labour, Firm Size and Firm Performance," CEPR Discussion Papers 5976, C.E.P.R. Discussion Papers.
    11. Katherine Cuff & Nicolas Marceau & Steeve Mongrain & Joanne Roberts, 2009. "Optimal Policies and the Informal Sector," Department of Economics Working Papers 2009-14, McMaster University.
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    More about this item


    Informal Labour Market; Labour Regulation; Tax Evasion; Payroll taxes; Corporate Income Taxes;

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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