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Is there a displacement deadweight loss from tax evasion? Estimates using firm surveys from the Czech Republic

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  • Jan Hanousek
  • Filip Palda

Abstract

In the presence of the underground economy taxes give rise to a deadweight loss from displacement of efficient producers by inefficient producers. We consider an economy in which a producer faces two types of costs: the cost of production, and taxes. If the ability to evade taxes is inversely proportional to the ability to keep production costs down, high tax rates may cause inefficient producers to crowd out efficient producers. We estimate this deadweight loss from surveys of 426 Czech firms taken in 2004 and 2005. We find that the deadweight loss due to this crowding out can be several times as large as the triangle deadweight losses from discouraged consumption. Our paper provides the first estimates ever of the displacement loss from tax evasion.
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  • Jan Hanousek & Filip Palda, 2009. "Is there a displacement deadweight loss from tax evasion? Estimates using firm surveys from the Czech Republic," Economic Change and Restructuring, Springer, vol. 42(3), pages 139-158, August.
    • Handle: RePEc:kap:ecopln:v:42:y:2009:i:3:p:139-158
    DOI: 10.1007/s10644-008-9056-2
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    1. repec:isa:wpaper:56) is not listed on IDEAS
    2. Usher, Dan, 1986. "Tax Evasion and the Marginal Cost of Public Funds," Economic Inquiry, Western Economic Association International, vol. 24(4), pages 563-586, October.
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    11. Alm, James, 1985. "The Welfare Cost of the Underground Economy," Economic Inquiry, Western Economic Association International, vol. 23(2), pages 243-263, April.
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    Cited by:

    1. Anna Kochanova, 2012. "The Impact of Bribery on Firm Performance: Evidence from Central and Eastern European Countries," CERGE-EI Working Papers wp473, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Alexandre Couture Gagnon, 2018. "Filip Palda: In memoriam," Public Choice, Springer, vol. 174(3), pages 213-217, March.
    3. Hanousek, Jan & Kochanova, Anna, 2015. "Bribery Environment and Firm Performance: Evidence from Central and Eastern European Countries," CEPR Discussion Papers 10499, C.E.P.R. Discussion Papers.
    4. Hanousek, Jan & Kochanova, Anna, 2016. "Bribery environments and firm performance: Evidence from CEE countries," European Journal of Political Economy, Elsevier, vol. 43(C), pages 14-28.

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    More about this item

    Keywords

    Underground economy; Social cost of public funds; Taxation; Tax evasion; H26; H43; K42; O17;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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