Abstract

The relationship between corporate income tax rates and innovation is a critical international issue. Existing studies often overlook the potential mechanisms of market competition and productivity heterogeneity. This paper addresses these gaps by integrating these elements into a unified mathematical analysis framework. Using China’s corporate income tax reform as a quasi-natural experiment, this study empirically tests the model. The findings reveal that decreases in tax rates significantly foster innovation, while increases have the opposite effect. The underlying mechanism involves market competition, with the impact of tax changes being more pronounced in firms with higher productivity. This study deepens the understanding of the nexus between corporate income tax and innovation, providing new insights to refine tax policies that promote innovative economic development globally.

Introduction

The adjustment of corporate income tax rates significantly impacts economic dynamics, influencing corporate investment strategies and innovation activities. Prior research underscores innovation’s crucial role in driving long-term economic growth and delineates the foundational contributions of tax policies to shaping economic landscapes, highlighting the substantial influences of tax adjustments on both resource allocation and innovative outputs [1–4]. Particularly, China’s monumental corporate income tax reform (CITR) in 2008, which standardized tax rates across domestic and foreign entities, provides a unique empirical setting to explore these effects due to its global economic stature and rapid development. This study critically evaluates how CITR influences corporate innovation by dissecting the direct and indirect mechanisms through which tax changes affect firms’ operational and strategic behaviors. Leveraging China’s 2008 CITR as a quasi-natural experiment, this research not only enhances understanding of the dynamic interactions between tax policies and corporate innovation activities but also informs precise, data-driven policy making to stimulate economic and innovative growth. Through a comprehensive analysis, informed by the empirical data from the CITR [5], this investigation is pivotal for its potential to guide global economic policy, given the scale of China’s economy and the extensive implications of its tax reforms.

Previous studies, such as those by Atanassov & Liu (2020) and Akcigit et al. (2022), have extensively explored how changes in corporate income tax rates impact corporate innovation directly, primarily through adjustments in funding and cost structures [6,7]. However, these studies have tended to overlook the indirect pathways through which tax policies affect innovation, particularly the mediating role of market dynamics. Additionally, there is a notable gap in understanding how these tax effects vary among firms with different levels of productivity. This oversight forms the basis of our research motivation, leading us to investigate the broader and more nuanced impacts of tax rate changes.

Results and discussion

4.1 Basic regression
Baseline results. In our baseline regression analysis, we rigorously evaluated the overarching impact of CITR on innovation, as detailed in Table 3. Initial results from columns (1)–(3), utilizing PAC as the dependent variable, reveal that the beneficial impact of a tax decrease (Tax-down#Post08) on PAC, though somewhat diminished with the progressive inclusion of control variables and bidirectional fixed effects, remains statistically significant at the 1 % level. This suggests that the reduction in corporate tax rate notably enhances corporate innovation, evidenced by a 7.31 % increase in PAC. Conversely, the detrimental impact of a tax increase (Tax-up#Post08) on PAC progressively intensifies and is also significant at the 1 % level, reflecting a substantial 9.08 % reduction in PAC due to the heightened corporate tax rate. Further analyses presented in columns (4)–(6), with PGC as the dependent variable, align with these findings. A decrease in the corporate income tax rate (Tax-down#Post08) significantly boosts PGC by 8.89 %, whereas an increase (Tax-up#Post08) correspondingly depresses PGC by 6.91 %.

Abstract

     What is the compliance effect of experiencing a tax audit? Empirical studies typically report a positive effect, while laboratory experiments frequently report a negative effect. We show experimentally that whether a tax audit increases or decreases subsequent compliance hinges on the balance of learning opportunities, misperception of audit risk, and the confounding effect of censoring. After an audit, taxpayers lower their perceived risk of audit – consistent with a bomb-crater effect – when audit selection is exogenous. However, for an endogenous audit rule under which taxpayers can learn to reduce their audit risk by reporting higher income, learning effects outweigh probability misperception, resulting in an increase in post-audit tax compliance. Finally, we show that accounting for censoring effects can eliminate on its own the negative post-audit compliance effect frequently observed in laboratory experiments.

Introduction

     Tax audits are an essential instrument in achieving compliance. While the threat of audit may itself alter compliance behavior, what effect, if any, does carrying out an audit have upon the future compliance of its target (the post-audit effect)?

Under conventional assumptions on risk aversion, the seminal Allingham-Sandmo (AS) analysis of tax compliance, Allingham and Sandmo (1972), predicts a zero post-audit effect for audited taxpayers who do not receive a fine, and a positive post-audit effect for fined taxpayers. Thus, empirically, the average post-audit effect is predicted to be positive, but potentially difficult to distinguish statistically from zero in samples where a high proportion of audits do not lead to fines. This prediction of a positive average post-audit effect is broadly in line with a growing empirical literature on post-audit effects, but discordant with experimental findings, which are instead consistent with a (weakly) negative average post-audit effect. Such seemingly contradictory findings in the existing evidence base on the post-audit effect are consequential for tax enforcement policy: audits are costly, so determining how many to do and how best to allocate them are key policy questions. If, as the experimental evidence suggests, auditing taxpayers reduces their subsequent compliance, this weakens the case for auditing, and strengthens the case for alternative compliance measures, e.g., enhanced taxpayer support. Also, tax administrations should seek to maximize the perceived risk of audit while at the same time minimizing the number of audits they actually perform. If, however, auditing increases compliance, as suggested in the empirical literature, tax administrations should seek to maximize the number of audits they actually perform.

Conclusion

     The sign and size of the post-audit effect is an important ingredient in determining optimal enforcement of the tax system. Prior literature has struggled to agree on the sign of the effect, however, with field studies generally pointing to a positive effect, but experimental findings often pointing to a negative effect.

As discussed in the Introduction, much of the existing field literature has the characteristic that findings indicating a positive post-audit effect are interpreted as signifying both (i) the presence of a rational deterrence effect, operating via learning; and (ii) the absence of a bomb-crater effect. Proceeding from this perspective, the apparent presence of the bomb-crater effect in laboratory outcomes must then be interpreted as evidence of a failure of external validity with respect to laboratory experiments. The perspective suggested by our findings is rather different. It is that evidence – both from the field and the laboratory – will simultaneously comprise effects due to learning, probability misperception (driving a bomb-crater effect), and censoring. It is only the sizes of these competing effects that may differ systematically between the field and the laboratory. This view is supported by the observation that, as we harmonize conditions in the laboratory towards those in the field (a process which would be expected to converge the sizes of the effects discussed with those observed in the field), our findings in the laboratory indeed converge towards those in the field. Moreover, from this alternative vantage, one might go as far as to argue that, in light of the systematic differences between laboratory and field settings in the existing literature, it would be more surprising were the outcomes from the experimental literature convergent with those from field studies, than were they divergent.

Abstract

     Data storage for attendance at a company or agency is usually stored in a local or cloud database. This type of storage has several issues, such as privacy and data integrity, because several parties will fully regulate privacy and data integrity. Therefore, a data storage system is needed that can provide privacy, security, and data integrity to maintain the authenticity of sensitive data. This study wants to develop to implement blockchain technology to store employee attendance data from the HR department in a company. Employee attendance data is taken from the Angular web application integrated with a permissioned blockchain framework called Hyperledger Composer. This study chose Hyperledger Composer because this type of blockchain has a fast validation time. Hyperledger Composer has a Representational State Transfer Application Programming Interface (REST API) named composer-rest-server, which allows Hyperledger blockchain to interact with other components. The implementation results show that Hyperledger Composer can be functionally used as data storage for the attendance management and Payroll system. In addition, Hyperledger Composer performance is measured by evaluating block transaction times. The evaluation of the Hyperledger Composer is done in three ways: directly within the Hyperledger Composer, using the Angular web application through the REST API, and using JMeter through the REST API. As a result, testing for making transaction blocks varies from 1 – 17ms on an experiment directly in Hyperledger Composer, 5 – 296ms through the REST API using JMeter tools, and 1 – 4270ms through the Angular Web Application. The result shows that the performance of the REST API produced by the composer-rest-server is recorded faster than Ethereum. With these results, composer-rest-server can handle systems that require fast transaction times, such as voting systems, health monitoring, and the Internet of Things (IoT) application, because the average time to conduct transactions is still under one second. Thus, Hyperledger as attendance data storage can provide privacy and data integrity.

Introduction

     Blockchain is a distributed digital ledger technology that Nowadays, the development and use of technology are developing more rapidly in various fields, one of which is information technology. Information technology is a technology used to get, store, organize, process, and manipulate the amount of data to produce relevant and accurate information. The attendance management and payroll system are some of the information systems on financial activities required in a company or agency. The use of this information system can provide an accurate report of attendance records and payroll. The attendance management and payroll system is a system that processes the attendance information to determine the total salary of each employee. Attendance data is sensitive information that must be maintained for authenticity because it can affect the number of salaries to be paid.

Conclusion

     The blockchain attendance management and payroll system design can be well implemented. All functions of the Hyperledger Composer component and the Angular web application are running properly and according to the design. Hyperledger Composer can communicate with the other components through the REST API provided by the composer-rest-server. The REST API provided by composerrest-server performs well through JMeter with an average transaction time of 198ms and the total time required for 100 transactions of 1.98 seconds compared to Ethereum Blockchain. Blockchain technology can support the attendance and payroll system, so this system has advantages in data security and data integrity.

Abstract

     We analyze the likelihood of financial statement manipulation among 19 listed manufacturing and trading firms on the Ghana Stock Exchange for the period 2008 to 2017. We use the Beneish model to group the firms into those likely to engage in financial statement manipulation and those not likely to be involved in financial statement manipulation. Generally, the results show that majority of the firms are likely to be involved in financial statement manipulation. Also, we find that profitability, liquidity, financial leverage, change of audit firm, and the overall economic condition (Z-score) are firm-level factors that predict the likelihood of financial statement manipulation among listed manufacturing and trading firms in Ghana. Given the high number of manufacturing and trading firms likely to engage in financial statement manipulation, there is the need for the managers of the Ghana Stock Exchange to subject future financial reports of these firms to rigorous scrutiny to safeguard the interest of their stakeholders.

Introduction

     Three objectives drive this study. First, the study seeks to detect the likelihood of financial statement manipulation1 among listed firms in Ghana using the Beneish (1999) model. Second, it examines whether financial ratios characteristics differ among firms that are likely to engage in financial statement manipulation and those not likely to manipulate their financial statements. Third, it determines the financial ratios2 that predict the likelihood of financial statement fraud.

     The fundamental purpose of corporate financial reporting is to provide the actual state of affairs of an entity to its stakeholders. The rationale is that users of financial reports found their economic decisions on information contained in such reports (Kanapickienė & Grundienė, 2015). It is for this reason that financial statement fraud is considered a serious legal and ethical issue in accounting practice. In this study, financial statement fraud is defined as any act of omission or misstatement deliberately done or committed by a firm in its financial reporting that distorts the entity’s real state of affairs. This definition, to a considerable extent, dovetails into that of Apostolou, Hassell, and Webber (2000), who define corporate financial fraud as the “intentional misrepresentation of amounts or disclosures in the financial statements” (p.181).

Conclusion

     The research seeks to detect financial statement manipulation among 19 listed manufacturing and trading firms in Ghana using the Beneish model and financial ratios. The study covers 2008 to 2017 fiscal years. We use a probit regression technique to predict the probability of a listed manufacturing and trading firm engaging in corporate financial fraud. The results demonstrate that the majority of listed manufacturing and trading firms are likely to engage in financial statement manipulation. The study, therefore, concludes that financial statement manipulation may be prevalent among listed manufacturing and trading firms in Ghana. Again, sales to fixed assets ratio (SAL/FA), total debt to total assets ratio (TD/TA), earnings before interest and tax to sales ratio (EBIT/ SAL), gross profit to sales ratio (GP/SAL), cost of sales to sales ratio (COS/SAL), working capital to total assets (WC/TA), current assets to current liabilities (CA/CL) and Z-score are the financial ratios that differ significantly between firms likely to engage in corporate financial statement fraud and those not likely to do so. A probit regression analysis has shown that profitability, overall financial condition, liquidity ratios as well as a change of their external auditors predict the likelihood of listed manufacturing and trading firms getting involved in financial statement manipulation.

Abstract

     Numerous countries cut payroll taxes in response to COVID-19, including China, which reduced employer contributions by up to 21 percentage points. We use administrative data on more than 800,000 Chinese firms to evaluate payroll tax cuts as a business relief measure. We estimate that the tax cuts cover 31.5% of the decline in business cash flow, but labor informality causes 53% of registered firms-24% of aggregate economic activity-to receive no benefits at all. We quantify the targeting of the policy in terms of how much benefits flow to small firms less able to access external finance and to sectors worse hit by COVID-19. We find that (1) small firms and vulnerable industries are comparatively more labor intensive, which leads to desirable targeting; (2) labor informality worsens, but does not eliminate, targeting by firm size; and (3) labor informality is uncorrelated with the COVID-19 shock, and therefore does not affect targeting by sector.

Policy background

     In the mid- to late-1990s, China adopted a mandatory “pay-as-you-go” pension system, Basic Old Age Insurance (BOAI), for employed persons funded mainly through employer contributions (see Fang and Feng (2018) for a history of pension programs in China). Likewise, in the early 2000s, a medical insurance (MI) program for employed persons was established, also funded by payroll taxes (Huang, 2020). These two programs are the largest components of the SI system. As of 2019, the nationally prescribed employer contribution rate for BOAI and MI was 16 and 8% of wages, respectively. BOAI and MI also require employee-side contributions-8 and 2%-which are recorded in notional individual accounts that are efectively pay-as-you-go.

Discussion and conclusion

     Many advanced economies responded to the COVID economic shock with fscal policies unprecedented in both scale and form. In comparison, China’s response to COVID by way of additional spending and foregone revenue is moderate as a proportion of its GDP and more typical for developing countries.28 Its payroll tax cuts amounted to about 1.68% of 2020 GDP, whereas in the USA the Paycheck Protection Program alone delivered government support equal to 4.55% of 2020 GDP.29 China’s choice of policy instrument was also conservative: instead of launching novel spending programs, it temporarily reduced rates under an existing tax.

Abstract

     Despite the unambiguous predictions of the canonical model of a competitive labor market, empirical studies of the labor market effects of payroll taxation provide conflicting evidence. We estimate the labor market impacts of payroll taxation in Singapore, the country with the most competitive and flexible labor market among the countries investigated in the literature. By exploiting the sharp reduction in payroll tax rate when workers turn 60, we find that the reduced payroll tax rate in Singapore has a large effect on wages without changes in employment. Our meta-analysis shows consistent evidence that varying degrees of labor market competitiveness across places and time could explain the mixed results in the literature. Our findings corroborate the prediction of the canonical model that the welfare costs of social insurance programs financed by payroll taxes can be small in a competitive labor market.

Introduction

     Most social insurance programs, such as old-age pension and health, disability, and unemployment insurance, are financed by payroll taxes (or social security contributions). These payroll taxes often account for more than 30% of workers’ labor income and about a quarter of the total tax revenue of OECD member countries (Saez et al., 2019). Although social insurance programs play an important role in improving social welfare, the payroll taxes levied to finance those programs can distort the labor market.

     In the canonical model of a competitive labor market, workers have an incentive to increase (decrease) their labor supply depending on how they value their social insurance benefits when the payroll tax rate increases (decreases). Thus, employers’ additional labor costs due to higher payroll taxes can be shifted to workers through reduced wage payments. If workers regard the payroll taxes borne by their employers as their social insurance benefits, the incidence of payroll taxes will fall solely on workers’ wages. This leaves employment or work hours unchanged, thereby minimizing deadweight loss in the labor market (Summers, 1989).

     Several empirical studies have tested Summers’ (1989) insights into the labor market impacts of payroll taxes to finance worker benefits across various countries and time periods and found mixed results. One possible explanation to reconcile the mixed findings in the literature is discrepancies in labor market institutions between the real world and the theoretical model. Although the canonical payroll tax incidence model assumes a perfectly competitive labor market, competitiveness in an actual labor market varies across countries, demographic groups, and time periods.

Conclusion

     Despite clear predictions under the canonical model of a competitive labor market, existing empirical studies have provided mixed evidence on how much a payroll tax change is shifted to workers’ wages. One possible explanation for this discrepancy is the heterogeneity in labor market flexibility across countries and time. To better understand the role of market flexibility or competitiveness, we investigate the labor market impact of payroll taxation in Singapore, where the labor market is considered more competitive and flexible than in any other country investigated in the literature. We document that saved labor costs via the reduced payroll tax rate largely shifts to workers’ wages. The estimated pass-through rate in Singapore is 77.5%, which is similar to the weighted average pass-through rate of the studied countries where wage bargaining predominantly takes place at the local or firm level, as in Singapore. These findings indicate that labor market competitiveness can play a significant role in determining the labor market impact of payroll taxation. A policy implication is that labor market distortion due to payroll taxation would be small when the labor market is competitive.

Abstract

     We investigate whether a firm’s financial statement comparability is associated with the firm’s tax strategy. We hypothesize that external observers (e.g. press, shareholders, analysts, and tax authorities) can better detect a firm’s atypical tax strategy when the firm has high financial statement comparability with its industry peers. Detection and its consequent penalties should restrain firm managers from choosing tax strategies that deviate significantly from those of industry peers. Using firms’ uncertain tax benefits (UTBs) as a proxy for tax avoidance, we find that the UTBs of firms with high financial statement comparability move toward their industry peers in subsequent periods. Results suggest that comparability reduces tax aggressiveness for high tax-avoidance firms and enhances tax aggressiveness for low tax-avoidance firms, in comparison with those of industry peers. Overall, these findings indicate a strong within-industry harmonization in tax avoidance for firms with high financial statement comparability.

Introduction

     Two sets of theoretical models motivate our hypothesis that firms’ financial reporting comparability is associated with their tax strategies. The first set of models proposes that external agents can improve their knowledge about a firm’s unique, unreported activities through comparison of peer firms’ financial reports (e.g. Cheynel & Levine, 2015; Kim & Verrecchia, 1997). This is because signals from peer firms’ financial reports could be complementary as well as substitutive. As such, external agents can interpolate and infer managers’ unobserved actions by combination and analysis of peer firms’ signals. The second set of models sets forth that external agents’ improved knowledge of managers’ actions can cause the managers to change their actions in subsequent periods (e.g. Dye, 1990). Despite the salience of these models, sparse research has been done on whether and how peer firms’ joint financial reporting quality affects firms’ real activities, such as tax avoidance (e.g. Armstrong et al., 2015). We fill this research gap by examining whether comparability is associated with reduction in peer firms’ tax distance, that is, the difference between the tax avoidance of a firm and those of its industry peers in the same year.

Conclusion

     We examine and find that financial statement comparability could, in some instances, affect firms’ tax planning activities. Our study is based on the idea that comparability reduces the information acquisition costs for external agents, thereby improving the agents’ knowledge about a firm’s atypical tax planning activities. This improved knowledge, in turn, could alter the costs and benefits of tax avoidance. The changed cost–benefit profile of tax avoidance could induce tax managers to change their tax strategies that are perceived negatively by external agents. Consistent with this idea, our results indicate that comparability moves firms’ UTBs toward those of industry peers and, thus, promotes greater harmonization of tax strategies among industry peers.

Abstract

     A widespread perception exists that tax havens facilitate corporate opacity. This study provides new evidence on the association between tax havens and the transparency of firm financial reporting using a unique group of firms whose parent companies are incorporated in tax havens but whose headquarters or primary operations—that is, their base—are in nonhaven countries. While most research suggests a negative association between tax havens and transparency, I examine whether this association depends on the firm’s corporate governance environment as well as its capital market incentives. I find that the negative association is limited to firms subject to weak governance in the base country. In contrast, I find, among firms in stronger governance environments, a positive association between tax haven incorporation and transparency, which is most concentrated among firms with greater capital market incentives. My findings suggest that future researchers should use caution when assuming an unambiguous negative association between tax havens and corporate transparency. The study also provides unique evidence that tax planning can motivate higher transparency in certain settings.

Introduction

     A widespread belief exists that firms’ use of tax havens facilitates corporate opacity. Tax havens have unique regulations that can weaken shareholders’ ability to discipline managers and directors and can provide opportunities for reduced reporting quality or disclosure for tax haven–incorporated companies (Kun 2004; Moon 2018), which may motivate their managers to be less transparent. Many observers, including researchers, policymakers, and the media, have expressed concerns that tax havens let managers misbehave and hide information from financial statement users (e.g., Desai 2005; Morgenthau 2012; Black et al. 2013; Durnev et al. 2016, 2017; Atwood and Lewellen 2019). For example, the U.S. Senate has argued that the unique laws of tax havens can be used to circumvent U.S. securities safeguards, including disclosure requirements (U.S. Senate Permanent Subcommittee on Investigations 2006). Many sources also suggest that tax haven–incorporated companies provide financial information that is unreliable or insufficient to portray a firm’s economic situation.

Conclusion

     I provide new evidence on the association between tax haven use and financial reporting transparency using a unique sample of “tax haven firms” with tax haven–incorporated parents that are based primarily in a nonhaven country. I examine whether the association between tax haven incorporation and transparency is conditional on the firm’s corporate governance environment and capital market incentives. My results indicate that the association between tax haven incorporation and transparency depends on the strength of governance in the base country (i.e., the nonhaven country of headquarters or primary operations), in conjunction with capital market incentives. While I find an overall negative association between tax haven incorporation and transparency in the full sample, I find that firms facing weak country-level governance in the base country drive the baseline negative association. In contrast, I find that capital market incentives motivate tax haven firms to provide highertransparency, compared to other multinationals, among firms based in strong governance countries and firms based in weak governance countries with less severe potential internal governance problems. My study provides evidence that low transparency associated with tax havens is not ubiquitous, and the findings suggest that future researchers should use caution when assuming an unambiguous negative association between tax havens and transparency.

1- Introduction

2- Institutional background

3- Relevant literature and hypotheses development

4- Research design and data

5- Main analysis

6- Additional analysis

7- Conclusion

References

Introduction

Reporting on corporate social responsibility (CSR) is an emerging issue in corporate transparency. In addition to meeting the information needs of a range of stakeholders, CSR disclosure offers managers a unique opportunity to highlight the conduct and contributions of their companies regarding economic and social development. As CSR reporting is influenced by the choices, motives, and values of decision-makers, it is argued that corporate governance characteristics significantly influence CSR disclosure (Chan et al., 2014; Haniffa & Cooke, 2005; Jo & Harjoto, 2011). Thus, CSR and corporate governance are interrelated (Chan et al., 2014; Jo & Harjoto 2011). Corporate governance refers to the system of internal and external checks and balances which ensure companies are both accountable to their stakeholders and conducting their business in a socially responsible way (Solomon, 2013).

1- Introduction

2- Literature Review and Hypothesis Development

3- Data and variable construction

4- Model and Empirical Analysis

5- Conclusions

References

Abstract

Low tax morale is associated with domestic tax evasion. We find evidence of cross-border equity flows designed to evade taxes in low tax morale countries. Using Foreign Portfolio Equity Investment (FPI) flows into 21 OECD countries from 138 source countries and an index of tax morale from the World Value Survey (WVS), we show that individuals in countries with low tax morale engage in tax evasion via roundtripping through tax havens. This allows them to benefit from differential taxes applied to foreign investors vis-a-vis domestic investors. Our results remain robust to various measures of tax morale and distinct subsamples.

Introduction

Tax morale, the intrinsic motivation to pay taxes or feel guilt from failure to comply (Luttmer & Singhal, 2014), has been linked to domestic tax evasion by underreporting taxable income (Alm, Sanchez, & de Juan, 1995; Alm & McClellan, 2012; Halla, 2012; inter alia). Are these tax morale effects so pervasive that they motivate individuals also to engage in international evasion schemes, even to the extent that international portfolio investment flows are influenced? This study finds robust evidence that this, in fact, is the case. The determinants of tax morale have been widely explored (for example, Hofmann, Hoelzl, & Kirchler, 2008; DeBacker, Heim, & Tran, 2015; OECD, 2013; Luttmer & Singhal, 2014). Tax morale is negatively correlated with shadow economy activities and positively correlated with direct democracy. This may be explained by differences in the fairness of tax administration, perceived equity of fiscal exchange, attitude toward respective governments (Cummings, Martinez-Vazquez, McKee, & Torgler, 2004), differences in culture, which also interact with demographics (Botelho, Harrison, Hirsch, & Elisabet, 2001), and trustworthiness (Ashraf, Bohnet, & Piankov, 2006). However, proxies for tax morale are challenging to construct. Slemrod and Weber (2012) argue that a single tax morale indicator, rather than an index of indicators, provides a more straightforward gauge of its relative importance. Recent survey efforts on culture and social values include questions on attitudes toward tax paying and corruption, inter alia (World Values Survey; Inglehart et al., 2014). Herein, we use an indicator based on country-level survey response data to questions of perceived tax fairness.1 Since measuring tax evasion is challenging (Alm & Torgler, 2011), we use roundtripping as an indirect approach to capture it. We focus on OECD foreign portfolio investment (FPI) inflows through tax havens that are attributable to changes in tax savings. The concept of roundtripping is straightforward and illustrated in Fig. 1. Domestic investors create and capitalize shell companies overseas, in tax havens, before they invest those funds back into their home capital markets, where incoming funds are now recorded as foreign capital and taxed at a more favorable rate. Changes in the tax differential between a domestic investor and a foreign investor is an important determinant of foreign equity flows (Hanlon, Maydew, & Thornock, 2015; Kemme, Parikh, & Steigner, 2017) and an indicator of tax evasion, but not the only one. We find that the attitude of individuals toward the payment of taxes in general, or tax morale, is another noteworthy determinant of tax evasion, which has not been studied extensively in this context.

1- Introduction

2- A novel approach to detecting tax evasion

3- Application: policy shock in Turkey

4- “Missing trade” approach as external validation

5- How persistent is evasion?

6- Conclusions

References

Abstract

This paper draws attention to import duty evasion as a margin through which firms adjust to changes in trade policy. This margin is different from the other forms of adjustment, as it can be employed very fast and thus it may constitute the initial reaction to the shock before a slower adjustment through the other channels takes place. The study also proposes a new method of detecting tax evasion in international trade, based on deviations from Benford’s law. It applies the method in the context of an unexpected policy change in Turkey that increased the cost of import financing. The results are consistent with an immediate increase in tax evasion in the affected import flows, which dies down a year later. A standard approach to detecting tariff evasion, based on “missing trade”, confirms these conclusions.

Introduction

One of the key questions in international trade is how firms adjust to changes in trade policy. The literature has demonstrated theoretically and empirically that the adjustment can take place through firm entry and exit, reallocation of market shares driven by differences in firm productivities and changes to the product portfolio. This paper draws attention to another margin of adjustment—evasion of import duties in response to increases in border taxes. This margin is different from the other forms of adjustment, as it can be employed very fast and thus it may constitute the initial reaction to the shock before a slower adjustment through the other channels takes place. Understanding and acknowledging the existence of this margin matters, as any analysis of the consequences of short-run trade policy changes that fails to take into account changes in evasion is likely to present a distorted picture of reality. By its very nature tax evasion is difficult to detect as the parties involved have every incentive to conceal their lack of compliance with the tax law. Despite the great importance of tax evasion to public policy choices, it remains elusive and difficult to detect through a statistical analysis. This paper contributes to the literature by proposing a new method of detecting tax evasion in the context of border taxes. The proposed method is based on Benford’s law, which describes the distribution of first digits in economic or accounting data.

1- Introduction

2- The Catalan Tax on sugar-sweetened drinks

3- Data

4- Econometric strategy & results

5- Conclusions

References

Abstract

In this paper, we analyze a tax on sugar-sweetened beverages (SSB) that was introduced in Catalonia on May 1, 2017. The Bill established the requirement of a 100% pass-through of the tax to the final consumer and two levels of the tax: 0.08 euro/liter for products with 5-less than 8 g of sugar and 0.12 euro/liter for products with 8 g of sugar or more. Previous literature focusing on the impact of SSB taxes finds that pass-though is only complete in the long-term. Our paper provides new evidence that, when the tax increases prices substantially and immediately, the sales response is also significant. In particular, we estimate that the new SSB tax in Catalonia reduced SSB purchases by 7.7%. We document that part of this reduction is substituted by an increase in sales of zero/light drinks (substitution effect). Importantly, the reduction in purchases is stronger in areas with a higher incidence of obesity, in areas with higher household incomes and for products with higher sugar content.

Introduction

In most developed countries, the incidence of overweight and obesity is growing very rapidly. In OECD countries, 54% of the adult population was overweight in 2015, and approximately 19.5% of the population was obese (see Figs. 1 and 2 below, OECD Health Statistics, 2017).1 Furthermore, these conditions are a growing concern not only for the adult population but also for children.2 Higher overweight incidence among children is worrying because it will entail increases in public health problems in the future. Indeed, OECD projections show a steady increase in overweight prevalence until at least 2030 (OECD, 2017). Consumption of sugar is considered to be one of the driving causes of the growing overweight and obesity incidence (Te Morenga et al., 2012), and part of the sugar consumption and its associated excess caloric intake comes from the consumption of sugar-sweetened beverages (SSBs).3 Block (2004) reports that the number one contributor of energy intake is soft drinks, which contributes 7.1% of energy intake in two representative surveys in the United States. In a meta-analysis summarizing the results of 32 studies, there is evidence from cohort analysis showing that an increment of one daily serving of SSBs is associated with a 0.22 kg weight gain in adults over one year (Malik et al., 2013). Furthermore, there is increasing evidence showing the direct link between the consumption of SSBs and numerous health problems, such as increased risk of cardiovascular diseases (coronary heart diseases and strokes, Bechthold et al., 2017), increased risk of hypertension (Schwingshackl et al., 2017), and diabetes 2 and metabolic syndrome (Malik et al., 2010). In a recently published paper using a large prospective cohort of more than 100,000 participants, the consumption of sugary drinks is found to be associated with increased risk of overall cancer and breast cancer (Chazelas et al., 2019).

1- Introduction

2- Model

3- Comparative statics of network interaction

4- Audit targeting and network structure

5- Conclusion

References

Abstract

We relate tax evasion behavior to a substantial literature on social comparison in judgements. Taxpayers engage in tax evasion as a means to boost their expected consumption relative to others in their social network. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. Given that tax authorities are now investing heavily in big-data tools that aim to construct social networks, we investigate the value of acquiring network information. We do this using networks that allow for celebrity taxpayers, whose consumption is seen widely, and who are systematically of higher wealth. We show that there are pronounced returns to the initial acquisition of network information, especially in the presence of celebrity taxpayers.

Introduction

Tax evasion is a significant economic phenomenon. Estimates provided by the UK tax authority put the value of the tax gap – the difference between the theoretical tax liability and the amount of tax paid – at 6.5% (H.M. Revenue and Customs, 2016). Academic studies for the US and Europe put the gap substantially higher, at around 18–20% (Cebula and Feige, 2012; Buehn and Schneider, 2016). In this paper we link evasion behavior to a mass of evidence that people engage in comparisons with others (social comparison). Utility, evidence for developed economies suggests, is in large part derived from consumption relative to social comparators, rather than from its absolute level (e.g., Ferrer-i Carbonell, 2005; Luttmer, 2005; Clark and Senik, 2010; Mujcic and Frijters, 2013). The evolutionary processes that might explain this phenomenon are explored in Postlewaite (1998), Rayo and Becker (2007) and Samuelson (2004), among others. Researchers have proposed that social comparison can explain economic phenomena including the Easterlin paradox (Clark et al., 2008; Rablen, 2008), stable labor supply in the face of rising incomes (Neumark and Postlewaite, 1998); the feeling of poverty (Sen, 1983) the demand for risky activities (Becker et al., 2005) and migration choices (Stark and Taylor, 1991).