Premium
The evasion of fiscal and labor regulations: Firm behavior and optimal tax policy
Author(s) -
Cuff Katherine,
Mongrain Steeve,
Roberts Joanne
Publication year - 2020
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12394
Subject(s) - tax evasion , evasion (ethics) , economics , government (linguistics) , face (sociological concept) , microeconomics , public economics , immune system , immunology , biology , social science , linguistics , philosophy , sociology
Firms face many fiscal and labor regulations, but they may evade these legal requirements in several different ways. We develop a model that captures these two types of evasion decisions and unlike existing literature assume firms can evade labor regulations independently from income tax responsibilities. We characterize firms’ entry and evasion behavior and find that the design of the tax system can generate both positive and negative correlations between evasion decisions consistent with what is observed empirically. We then characterize optimal government policies given the firms’ decisions. We obtain intuitive optimal tax rules that highlight the trade‐offs the government faces when firms have multiple margins on which to evade.