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Enrico Rubolino (Lausanne) “Market Externalities of Tax Evasion”

January 31 @ 12:15 pm - 1:30 pm

Applied Seminar 
Time: 12:15 pm – 13:30 pm
Date: 31th of January
Room : 3001

 

Enrico Rubolino (Lausanne) “Market Externalities of Tax Evasion”

Abstract : This paper shows that tax evasion significantly distorts market competition and firm growth. Using administrative data on the universe of firms in Italy, we compute a tax evasion proxy as the fraction of individual firms who manipulate their revenue to meet eligibility criteria for several preferential tax regimes. This measure widely varies geographically, across industries, and over time within municipality-industry cells, our fine definition of a market. We examine the impact of market-level variations in tax evasion on competitor firms, defined as those non-eligible for preferential tax regimes and operating in the same market. To address endogeneity concerns, we use policy-induced changes in tax notches’ size to predict the fraction of non-compliant firms in each market. Our findings indicate that as the proportion of non-compliant firms in a market increases, their competitors suffer significant revenue losses. This unfair competition erodes firms’ productivity and reduces their survival rates. Firms respond to these losses by shifting some of the burden to workers. Our findings suggest that cracking down on tax evasion not only increases tax revenue and promotes tax fairness, but can also enhance market efficiency by leveling the playing field.

Organizer: Pierre BOYER