Financial constraints and firm tax evasion

James Alm (), Yongzheng Liu and Kewei Zhang ()
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Kewei Zhang: Renmin University of China

International Tax and Public Finance, 2019, vol. 26, issue 1, No 4, 102 pages

Abstract: 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 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.

Keywords: Tax evasion; Financial constraints; Firm-level data (search for similar items in EconPapers)
JEL-codes: E26 G2 H26 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (29)

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Working Paper: Financial Constraints and Firm Tax Evasion (2019)
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DOI: 10.1007/s10797-018-9502-7

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