Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/tul/wpaper/1901.html
   My bibliography  Save this paper

Financial Constraints and Firm Tax Evasion

Author

Listed:
  • James Alm

    (Tulane University)

  • Yongzheng Liu

    (Renmin University of China)

  • Kewei Zhang

    (Renmin University of China)

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 and credit 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.

Suggested Citation

  • James Alm & Yongzheng Liu & Kewei Zhang, 2019. "Financial Constraints and Firm Tax Evasion," Working Papers 1901, Tulane University, Department of Economics.
    • Handle: RePEc:tul:wpaper:1901
    as

    Download full text from publisher

    File URL: http://repec.tulane.edu/RePEc/pdf/tul1901.pdf
    File Function: First Version, April 2019
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Desai, Mihir A. & Dharmapala, Dhammika, 2006. "Corporate tax avoidance and high-powered incentives," Journal of Financial Economics, Elsevier, vol. 79(1), pages 145-179, January.
    2. Chen, Shuping & Chen, Xia & Cheng, Qiang & Shevlin, Terry, 2010. "Are family firms more tax aggressive than non-family firms?," Journal of Financial Economics, Elsevier, vol. 95(1), pages 41-61, January.
    3. James Alm, 2017. "Is Economics Useful for Public Policy?," Southern Economic Journal, John Wiley & Sons, vol. 83(4), pages 835-854, April.
    4. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, vol. 78(2), pages 299-321, December.
    5. Blackburn, Keith & Bose, Niloy & Capasso, Salvatore, 2012. "Tax evasion, the underground economy and financial development," Journal of Economic Behavior & Organization, Elsevier, vol. 83(2), pages 243-253.
    6. David J. Denis & Valeriy Sibilkov, 2010. "Financial Constraints, Investment, and the Value of Cash Holdings," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 247-269, January.
    7. Thorben C. Kundt & Florian Misch & Birger Nerré, 2017. "Re-assessing the merits of measuring tax evasion through business surveys: an application of the crosswise model," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(1), pages 112-133, February.
    8. Paul Carrillo & Dina Pomeranz & Monica Singhal, 2017. "Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement," American Economic Journal: Applied Economics, American Economic Association, vol. 9(2), pages 144-164, April.
    9. Alm, James & Martinez-Vazquez, Jorge & McClellan, Chandler, 2016. "Corruption and firm tax evasion," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 146-163.
    10. Goerke, Laszlo & Runkel, Marco, 2006. "Profit Tax Evasion Under Oligopoly With Endogenous Market Structure," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(4), pages 851-857, December.
    11. Johnson, Simon & Kaufmann, Daniel & McMillan, John & Woodruff, Christopher, 2000. "Why do firms hide? Bribes and unofficial activity after communism," Journal of Public Economics, Elsevier, vol. 76(3), pages 495-520, June.
    12. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2006. "Bank supervision and corruption in lending," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2131-2163, November.
    13. Thorsten Beck & Chen Lin & Yue Ma, 2014. "Why Do Firms Evade Taxes? The Role of Information Sharing and Financial Sector Outreach," Journal of Finance, American Finance Association, vol. 69(2), pages 763-817, April.
    14. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    15. Agnar Sandmo, 2012. "An evasive topic: theorizing about the hidden economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 5-24, February.
    16. Yuriy Gorodnichenko & Monika Schnitzer, 2013. "Financial Constraints And Innovation: Why Poor Countries Don'T Catch Up," Journal of the European Economic Association, European Economic Association, vol. 11(5), pages 1115-1152, October.
    17. Alm, James & Blackwell, Calvin & McKee, Michael, 2004. "Audit Selection and Firm Compliance With a Broad-Based Sales Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(2), pages 209-227, June.
    18. Sandmo, Agnar, 2005. "The Theory of Tax Evasion: A Retrospective View," National Tax Journal, National Tax Association;National Tax Journal, vol. 58(4), pages 643-663, December.
    19. Murray, Matthew N., 1995. "Sales Tax Compliance and Audit Selection," National Tax Journal, National Tax Association, vol. 48(4), pages 515-30, December.
    20. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    21. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    22. Brown, Martin & Jappelli, Tullio & Pagano, Marco, 2009. "Information sharing and credit: Firm-level evidence from transition countries," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 151-172, April.
    23. 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.
    24. Thorsten Beck & Asli Demirgüç‐Kunt & Vojislav Maksimovic, 2005. "Financial and Legal Constraints to Growth: Does Firm Size Matter?," Journal of Finance, American Finance Association, vol. 60(1), pages 137-177, February.
    25. Kenyon, Thomas, 2008. "Tax Evasion, Disclosure, and Participation in Financial Markets: Evidence from Brazilian Firms," World Development, Elsevier, vol. 36(11), pages 2512-2525, November.
    26. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
    27. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470, Elsevier.
    28. Laszlo Goerke & Marco Runkel, 2011. "Tax evasion and competition," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(5), pages 711-736, November.
    29. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 855-866, August.
    30. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    31. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    32. Murray, Matthew N., 1995. "Sales Tax Compliance and Audit Selection," National Tax Journal, National Tax Association;National Tax Journal, vol. 48(4), pages 515-530, December.
    33. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484, April.
    34. Crocker, Keith J. & Slemrod, Joel, 2005. "Corporate tax evasion with agency costs," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1593-1610, September.
    35. Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
    36. Abhijit V. Banerjee & Esther Duflo, 2014. "Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(2), pages 572-607.
    37. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 423-423.
    38. Ann E. Harrison & Margaret S. McMillan, 2022. "Does direct foreign investment affect domestic credit constraints?," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 7, pages 153-180, World Scientific Publishing Co. Pte. Ltd..
    39. Elffers, Henk & Weigel, Russell H. & Hessing, Dick J., 1987. "The consequences of different strategies for measuring tax evasion behavior," Journal of Economic Psychology, Elsevier, vol. 8(3), pages 311-337, September.
    40. Wang, Leonard F.S. & Conant, John L., 1988. "Corporate Tax Evasion and Output Decisions of the Uncertain Monopolist," National Tax Journal, National Tax Association, vol. 41(4), pages 579-81, December.
    41. Robert C. Feenstra & Zhiyuan Li & Miaojie Yu, 2014. "Exports and Credit Constraints under Incomplete Information: Theory and Evidence from China," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 729-744, October.
    42. James Alm, 2012. "Measuring, explaining, and controlling tax evasion: lessons from theory, experiments, and field studies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 54-77, February.
    43. Nicky J. Welton & Howard H. Z. Thom, 2015. "Value of Information," Medical Decision Making, , vol. 35(5), pages 564-566, July.
    44. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
    45. Barth, James R. & Lin, Chen & Lin, Ping & Song, Frank M., 2009. "Corruption in bank lending to firms: Cross-country micro evidence on the beneficial role of competition and information sharing," Journal of Financial Economics, Elsevier, vol. 91(3), pages 361-388, March.
    46. Dina Pomeranz, 2015. "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax," American Economic Review, American Economic Association, vol. 105(8), pages 2539-2569, August.
    47. Erwan Quintin, 2008. "Contract enforcement and the size of the informal economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(3), pages 395-416, December.
    48. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    49. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2007. "Reaching out: Access to and use of banking services across countries," Journal of Financial Economics, Elsevier, vol. 85(1), pages 234-266, July.
    50. Wang, Leonard F.S. & Conant, John L., 1988. "Corporate Tax Evasion and Output Decisions of the Uncertain Monopolist," National Tax Journal, National Tax Association;National Tax Journal, vol. 41(4), pages 579-581, December.
    51. Bose, Pinaki, 1998. "Formal-informal sector interaction in rural credit markets," Journal of Development Economics, Elsevier, vol. 56(2), pages 265-280, August.
    52. Joel Slemrod & Caroline Weber, 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, Springer;International Institute of Public Finance, vol. 19(1), pages 25-53, February.
    53. Florian Baumann & Tim Friehe, 2010. "Tax Evasion, Investment, and Firm Activity," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(1), pages 1-14, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James Alm, 2019. "What Motivates Tax Compliance?," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 353-388, April.
    2. Alm, James & Martinez-Vazquez, Jorge & McClellan, Chandler, 2016. "Corruption and firm tax evasion," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 146-163.
    3. James Alm & Matthias Kasper, 2020. "Laboratory Experiments," Working Papers 2008, Tulane University, Department of Economics.
    4. Guo, Jang-Ting & Hung, Fu-Sheng, 2020. "Tax evasion and financial development under asymmetric information in credit markets," Journal of Development Economics, Elsevier, vol. 145(C).
    5. Thorsten Beck & Chen Lin & Yue Ma, 2014. "Why Do Firms Evade Taxes? The Role of Information Sharing and Financial Sector Outreach," Journal of Finance, American Finance Association, vol. 69(2), pages 763-817, April.
    6. Gareth Liu-Evans & Shalini Mitra, 2023. "Formal sector enforcement and welfare," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 706-728, June.
    7. Gokalp, Omer N. & Lee, Seung-Hyun & Peng, Mike W., 2017. "Competition and corporate tax evasion: An institution-based view," Journal of World Business, Elsevier, vol. 52(2), pages 258-269.
    8. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2016. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," Economica, London School of Economics and Political Science, vol. 83(330), pages 219-246, April.
    9. James Alm, 2012. "Measuring, explaining, and controlling tax evasion: lessons from theory, experiments, and field studies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 54-77, February.
    10. DeBacker, Jason & Heim, Bradley T. & Tran, Anh, 2015. "Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States," Journal of Financial Economics, Elsevier, vol. 117(1), pages 122-138.
    11. James E. Payne & James W. Saunoris, 2020. "Corruption and Firm Tax Evasion in Transition Economies: Results from Censored Quantile Instrumental Variables Estimation," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 48(2), pages 195-206, June.
    12. Fjeldstad, Odd-Helge & Kagoma, Cecilia & Mdee, Ephraim & Sjursen, Ingrid Hoem & Somville, Vincent, 2020. "The customer is king: Evidence on VAT compliance in Tanzania," World Development, Elsevier, vol. 128(C).
    13. Cyril Chalendard, 2015. "Use of internal information, external information acquisition and customs underreporting," Working Papers halshs-01179445, HAL.
    14. Duc Hong Vo & Ha Minh Nguyen & Tan Manh Vo & Michael McAleer, 2020. "Information Sharing, Bank Penetration and Tax Evasion in Emerging Markets," Risks, MDPI, vol. 8(2), pages 1-16, April.
    15. Hallsworth, Michael & List, John A. & Metcalfe, Robert D. & Vlaev, Ivo, 2017. "The behavioralist as tax collector: Using natural field experiments to enhance tax compliance," Journal of Public Economics, Elsevier, vol. 148(C), pages 14-31.
    16. Laszlo Goerke, 2007. "Corporate and personal income tax declarations," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(3), pages 281-292, June.
    17. Cyril Chalendard, 2015. "Use of internal information, external information acquisition and customs underreporting," CERDI Working papers halshs-01179445, HAL.
    18. Beck, T.H.L. & Hoseini, M., 2014. "Informality and Access to Finance : Evidence from India," Other publications TiSEM 00e890f4-bd1a-46ba-9064-7, Tilburg University, School of Economics and Management.
    19. Kristina M. Bott & Alexander W. Cappelen & Erik Ø. Sørensen & Bertil Tungodden, 2020. "You’ve Got Mail: A Randomized Field Experiment on Tax Evasion," Management Science, INFORMS, vol. 66(7), pages 2801-2819, July.
    20. James Alm, 2017. "Is Economics Useful for Public Policy?," Southern Economic Journal, John Wiley & Sons, vol. 83(4), pages 835-854, April.

    More about this item

    Keywords

    Tax evasion; financial constraints; firm-level data.;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • G2 - Financial Economics - - Financial Institutions and Services
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tul:wpaper:1901. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kerui Geng (email available below). General contact details of provider: https://edirc.repec.org/data/detulus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.