Financial constraints and firm tax evasion

Article
  • 2 Downloads

Abstract

Most analyses of tax evasion examine individual behavior, not firm behavior, given obvious and recognized data issues. We use data from the Business Environment and Enterprise Performance Survey to examine tax evasion at the firm level, focusing on a novel determinant of firm tax evasion: the financial constraints (or credit constraints) faced by the firm. Our empirical results indicate across a range of alternative specifications that more financially constrained firms are more likely to be involved in tax evasion activities, largely because evasion helps them deal with financing issues created by financial constraints. We further show that the effects of financial constraints are heterogeneous across firm ownership, firm age, and firm size. Lastly, we present some suggestive evidence on the possible channels through which the impact of financial constraints on firm tax evasion may operate, including a reduction of information disclosure through the banking system, an increase in the use of cash for transactions, and an increase in bribe activities in exchange for tax evasion opportunities.

Keywords

Tax evasion Financial constraints Firm-level data 

JEL Classification

E26 G2 H26 

Notes

Acknowledgements

We would like to thank Janina Enachescu and other participants at the 5th International Conference on “The Shadow Economy, Tax Evasion and Informal Labor,” held in Warsaw, Poland, in July 2017, for many helpful comments. This research was supported by the National Natural Science Foundation of China (Nos. 71773128; 71533006) and the Fok Ying Tung Education Foundation (No. 151085). We are especially grateful to two anonymous referees for many helpful comments and suggestions that have substantially improved the paper.

Supplementary material

10797_2018_9502_MOESM1_ESM.docx (108 kb)
Supplementary material 1 (DOCX 107 kb)

References

  1. Allingham, M. G., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3–4), 323–338.CrossRefGoogle Scholar
  2. Alm, J. (2012). Measuring, explaining, and controlling tax evasion: Lessons from theory, experiments, and field studies. International Tax and Public Finance, 19(1), 54–77.CrossRefGoogle Scholar
  3. Alm, J. (2017). Is economics useful for public policy? Southern Economic Journal, 83(4), 835–854.CrossRefGoogle Scholar
  4. Alm, J. (2018). What motivates tax compliance? Journal of Economic Surveys (forthcoming).Google Scholar
  5. Alm, J., Blackwell, C., & McKee, M. (2004). Audit selection and firm compliance with a broad-based sales tax. National Tax Journal, 57(2), 209–227.CrossRefGoogle Scholar
  6. Alm, J., Martinez-Vazquez, J., & McClellan, C. (2016). Corruption and firm tax evasion. Journal of Economic Behavior & Organization, 124, 146–163.CrossRefGoogle Scholar
  7. Andreoni, J., Erard, B., & Feinstein, J. (1998). Tax compliance. The Journal of Economic Literature, 36(2), 818–860.Google Scholar
  8. Banerjee, A. V., & Duflo, E. (2014). Do firms want to borrow more? Testing credit constraints using a directed lending program. The Review of Economic Studies, 81(2), 572–607.CrossRefGoogle Scholar
  9. Barth, J., Lin, C., Lin, P., & Song, F. (2009). Corruption in bank lending to firms: Cross-country micro-evidence on the beneficial role of competition and information sharing. Journal of Financial Economics, 91(3), 361–388.CrossRefGoogle Scholar
  10. Baumann, F., & Friehe, T. (2010). Tax evasion, investment, and firm activity. Finanzarchiv/Public Finance Analysis, 66(1), 1–14.CrossRefGoogle Scholar
  11. Beck, T., Demirguc-Kunt, A., & Levine, R. (2006). Bank supervision and corruption in lending. Journal of Monetary Economics, 53(8), 2131–2163.CrossRefGoogle Scholar
  12. Beck, T., Demirguc-Kunt, A., & Maksimovic, V. (2005). Financial and legal constraints to firm growth: Does size matter? Journal of Finance, 60(1), 137–177.CrossRefGoogle Scholar
  13. Beck, T., Demirguc-Kunt, A., & Peria, Maria S. M. (2007). Reaching out: Access to and use of banking services across countries. Journal of Financial Economics, 85(1), 234–266.CrossRefGoogle Scholar
  14. Beck, T., Lin, C., & Ma, Y. (2014). Why do firms evade taxes? The role of information sharing and financial sector outreach. The Journal of Finance, 69(2), 763–817.CrossRefGoogle Scholar
  15. Best, M. C., Brockmeyer, A., Kleven, H. J., Spinnewijn, J., & Waseem, M. (2015). Production versus revenue efficiency with limited tax capacity: Theory and evidence from Pakistan. The Journal of Political Economy, 123(6), 1311–1355.CrossRefGoogle Scholar
  16. Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behavior & Organization, 83(2), 243–253.CrossRefGoogle Scholar
  17. Boone, J. (2008). A new way to measure competition. The Economic Journal, 118(531), 1245–1261.CrossRefGoogle Scholar
  18. Bose, P. (1998). Formal-informal sector interaction in rural credit markets. Journal of Development Economics, 56(2), 265–280.CrossRefGoogle Scholar
  19. Brown, M., Jappelli, T., & Pagano, M. (2009). Information sharing and credit: Firm-level evidence from transition countries. Journal of Financial Intermediation, 18(2), 151–172.CrossRefGoogle Scholar
  20. Carillo, P., Pomeranz, D., & Singhal, M. (2017). Dodging the taxman: Firm misreporting and limits to tax enforcement. American Economic Journal: Applied Economics, 9(2), 144–164.Google Scholar
  21. Chen, S., Chen, X., Cheng, Q., & Shevlin, T. (2010). Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95(1), 41–61.CrossRefGoogle Scholar
  22. Cowell, F. A. (1990). Cheating the government: The economics of evasion. Cambridge, MA: The MIT Press.Google Scholar
  23. Crocker, K. J., & Slemrod, J. (2005). Corporate tax evasion with agency costs. Journal of Public Economics, 89(9–10), 1593–1610.CrossRefGoogle Scholar
  24. Dabla-Norris, E., Gradstein, M., & Inchauste, G. (2008). What causes firms to hide output? The determinants of informality. Journal of Development Economics, 85(1), 1–27.CrossRefGoogle Scholar
  25. de Mel, S., McKenzie, D., & Woodruff, C. (2008). Returns to capital in microenterprises: Evidence from a field experiment. The Quarterly Journal of Economics, 123(4), 1329–1372.CrossRefGoogle Scholar
  26. Denis, D. J., & Sibilkov, V. (2010). Financial constraints, investment, and the value of cash holdings. Review of Financial Studies, 23(1), 247–269.CrossRefGoogle Scholar
  27. Desai, M., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145–179.CrossRefGoogle Scholar
  28. Edwards, A., Schwab, C., & Shevlin, T. (2016). Financial constraints and cash tax savings. The Accounting Review, 91(3), 859–881.CrossRefGoogle Scholar
  29. Elffers, H., Weigel, R. H., & Hessing, D. J. (1987). The consequences of different strategies for measuring tax evasion behavior. Journal of Economic Psychology, 8(3), 311–337.CrossRefGoogle Scholar
  30. Feenstra, R. C., Li, Z., & Miaojie, Yu. (2014). Exports and credit constraints under incomplete information: Theory and evidence from China. The Review of Economics and Statistics, 96(4), 729–744.CrossRefGoogle Scholar
  31. Goerke, L., & Runkel, M. (2006). Profit tax evasion under oligopoly with endogenous market structure. National Tax Journal, 59(4), 851–857.CrossRefGoogle Scholar
  32. Goerke, L., & Runkel, M. (2011). Tax evasion and competition. Scottish Journal of Political Economy, 58(5), 711–736.CrossRefGoogle Scholar
  33. Gordon, R., & Li, W. (2009). Tax structures in developing countries: Many puzzles and a possible explanation. Journal of Public Economics, 93(7–8), 855–866.CrossRefGoogle Scholar
  34. Gorodnichenko, Y., & Schnitzer, M. (2013). Financial constraints and innovation: Why poor countries don’t catch up. Journal of the European Economic Association, 11(5), 1115–1152.CrossRefGoogle Scholar
  35. Hadlock, C. J., & Pierce, J. R. (2010). New evidence on measuring financial constraints: Moving beyond the KZ index. The Review of Financial Studies, 23(5), 1909–1940.CrossRefGoogle Scholar
  36. Harrison, A. E., & McMillan, M. (2003). Does direct foreign investment affect domestic credit constraints? Journal of International Economics, 61(1), 73–100.CrossRefGoogle Scholar
  37. Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1–3), 405–440.CrossRefGoogle Scholar
  38. Hubbard, R. Glenn. (1998). Capital market imperfections and investment. The Journal of Economic Literature, 36(1), 193–225.Google Scholar
  39. Johnson, S., Kaufmann, D., McMillan, J., & Woodruff, C. (2000). Why do firms hide? Bribes and unofficial activity after communism. Journal of Public Economics, 76(3), 495–520.CrossRefGoogle Scholar
  40. Kenyon, T. (2008). Tax evasion, disclosure, and participation in financial markets: Evidence from Brazilian firms. World Development, 36(11), 2512–2525.CrossRefGoogle Scholar
  41. Kundt, T., Misch, F., & Nerré, B. (2017). Re-assessing the merits of measuring tax evasion through business surveys: An application of the crosswise model. International Tax and Public Finance, 24(1), 112–133.CrossRefGoogle Scholar
  42. Mayberry, M. (2012). Tax avoidance and investment: Distinguishing the effects of capital rationing and overinvestment. Doctoral Dissertation, Texas A&M University.Google Scholar
  43. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance, and the theory of investment. The American Economic Review, 48(3), 261–297.Google Scholar
  44. Murray, M. N. (1995). Sales tax compliance and audit selection. National Tax Journal, 48(4), 515–530.Google Scholar
  45. Newey, W. K. (1987). Efficient estimation of limited dependent variable models with endogenous explanatory variables. Journal of Econometrics, 36(3), 231–250.CrossRefGoogle Scholar
  46. Pomeranz, D. (2015). No taxation without information: Deterrence and self-enforcement in the value added tax. The American Economic Review, 105(8), 2539–2569.CrossRefGoogle Scholar
  47. Quintin, E. (2008). Contract enforcement and the size of the informal economy. Economic Theory, 37(3), 395–416.CrossRefGoogle Scholar
  48. Rice, E. M. (1992). The corporate tax gap: Evidence on tax compliance by small corporations. In J. Slemrod (Ed.), Why people pay taxes (pp. 125–161). Ann Arbor, MI: The University of Michigan Press.Google Scholar
  49. Sandmo, A. (2005). The theory of tax evasion: A retrospective view. National Tax Journal, 58(4), 643–663.CrossRefGoogle Scholar
  50. Sandmo, A. (2012). An evasive topic: Theorizing about the hidden economy. International Tax and Public Finance, 19(1), 5–24.CrossRefGoogle Scholar
  51. Slemrod, J., & Weber, C. (2012). Evidence of the invisible: Toward a credibility revolution in the empirical analysis of tax evasion and the informal economy. International Tax and Public Finance, 12(1), 25–53.CrossRefGoogle Scholar
  52. Slemrod, J., & Yitzhaki, S. (2002). Tax avoidance, evasion, and administration. In A. J. Auerbach & M. Feldstein (Eds.), Handbook of public economics (Vol. 4, pp. 1423–1470). Amsterdam: Elsevier Publishing.Google Scholar
  53. Straub, S. (2005). Informal sector: The credit market channel. Journal of Development Economics, 78(2), 299–321.CrossRefGoogle Scholar
  54. Uslaner, E. M. (2010). Tax evasion, corruption, and the social contract in transition. In J. Alm, J. Martinez-Vazquez, & B. Torgler (Eds.), Developing alternative frameworks for explaining tax compliance (pp. 174–190). New York, NY: Routledge International Studies in Money and Banking.Google Scholar
  55. Wang, Leonard F. S., & Conant, J. L. (1988). Corporate tax evasion and output decisions of the uncertain monopolist. National Tax Journal, 41(4), 579–581.Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsTulane UniversityNew OrleansUSA
  2. 2.School of Finance, China Financial Policy Research CenterRenmin University of ChinaBeijingChina
  3. 3.School of FinanceRenmin University of ChinaBeijingChina
  4. 4.Department of EconomicsBoston UniversityBostonUSA

Personalised recommendations