14th journées Louis-André Gérard-Varet

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Dual Corporate Tax Evasion
Steeve Mongrain, Katherine Cuff, Joanne Roberts

Last modified: 2015-05-11

Abstract


Firms are subject to many forms of government regulation and laws. For example, firms must ensure their workplaces meet certain safety and health standards, pay payroll taxes to cover the provision of government provided benefits to their workers, collect sales taxes on goods sold and pay taxes on their income or profits. Obviously there are many ways firms can try 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 regulations) is perfectly linked to the decision to evade another government mandated activity (such as paying business income taxes). A firm decides either to evade both activities or neither activity. 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 income taxes. Interestingly, we find that the government optimally sets tax policies such that these two forms of evasion behaviour become linked.


Keywords


Informal Labour Market; Labour Regulation; Tax Evasion; Payroll taxes