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Shades of Grey: Business Compliance with Fiscal and Labour Regulations

Author

Listed:
  • Katherine Cuff

    (McMaster University)

  • Steeve Mongrain

    () (Simon Fraser University)

  • Joanne Roberts

    (University of Calgary)

Abstract

Firms face many legal regulations, including corporate tax laws and labour laws. There are many ways for firms to evade these legal requirements. Firms may employ workers informally to skip out on safety or health standards or to avoid paying payroll taxes. Firms may also misreport sales transactions to minimize sales or business tax liabilities. Much of the literature examining firm behaviour assumes that a firm's decision to evade one type of regulation (such as labour regulation) is perfectly linked to the decision to evade another (such as corporate income 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 business taxes. We find that the design of the tax system and firm entry decisions generate both positive and negative correlations between these two evasion decisions. We characterize the firms’ optimal entry and evasion behavior and derive the government's optimal tax policies. A pure pro t tax system with no payroll tax system, which is optimal in absence of business tax evasion, is no longer desirable when such evasion must be considered.

Suggested Citation

  • Katherine Cuff & Steeve Mongrain & Joanne Roberts, 2017. "Shades of Grey: Business Compliance with Fiscal and Labour Regulations," Discussion Papers dp17-07, Department of Economics, Simon Fraser University.
  • Handle: RePEc:sfu:sfudps:dp17-07
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    File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp17-07.pdf
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    References listed on IDEAS

    as
    1. Lipatov, Vilen, 2012. "Corporate tax evasion: The case for specialists," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 185-206.
    2. 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.
    3. Lambert Schoonbeek & Frans Vries, 2009. "Environmental taxes and industry monopolization," Journal of Regulatory Economics, Springer, pages 94-106.
    4. 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.
    5. 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.
    6. 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.
    7. Bayer, Ralph & Cowell, Frank, 2009. "Tax compliance and firms' strategic interdependence," Journal of Public Economics, Elsevier, vol. 93(11-12), pages 1131-1143, December.
    8. 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.
    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. 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.
    12. Katherine Cuff & Nicolas Marceau & Steeve Mongrain & Joanne Roberts, 2009. "Optimal Policies and the Informal Sector," Department of Economics Working Papers 2009-14, McMaster University.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    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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