Firm-oriented policies, tax cheating and perverse outcomes

Francesco Busato (), Bruno Chiarini, Pasquale De Angelis and Elisabetta Marzano

Discussion Papers from D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy

Abstract: This paper examines the implications of firm-oriented fiscal policies, namely investment subsidies and tax allowances, in an economy where producers may potentially avoid taxes. Among our results we stress the following. First, although investment subsidies induce increased capital accumulation (a level effect), they promote tax evasion; these subsidies induce firms to increase actual capital accumulation (a level effect), but also produce a reduction in the share of aggregate capital stock deployed in taxed, "official" production (a composition effect). Second, parameters characterizing the tax enforcement system play a major role in explaining tax evasion and firm size. Third, the technology structure matters for determining how to allocate resources between official and unofficial production.

Keywords: State aid; tax exemptions; investment subsidies; tax evasion; unofficial underground production; investment (search for similar items in EconPapers)
JEL-codes: E22 E26 H25 H26 (search for similar items in EconPapers)
Date: 2008-08-31
New Economics Papers: this item is included in nep-acc, nep-mac and nep-pbe
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Citations: View citations in EconPapers (2)

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