The market externalities of tax evasion

Irene Di Marzio (), Sauro Mocetti and Enrico Rubolino ()
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Irene Di Marzio: Bank of Italy
Enrico Rubolino: University of Lausanne

No 1467, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper presents evidence of the market externalities of tax evasion: firms' tax non-compliance distorts the outcomes of their competitors. Using novel administrative data on the universe of Italian firms, we compute a tax evasion proxy as the fraction of individual firms who manipulate their revenue to meet eligibility criteria for preferential tax regimes. Our empirical approach uses policy-induced changes in tax notch sizes to predict the fraction of non-compliant firms in each market. We find that non-compliant firms generate significant revenue and productivity losses for their competitors, who then pass on some of this burden to their workers. This unfair competition harms aggregate productivity, partly due to a worsening of allocative efficiency. Our findings show that cracking down on tax evasion not only increases tax revenues and promotes tax fairness, but can also enhance market efficiency by levelling the playing field.

Keywords: tax evasion; market competition; preferential tax regimes (search for similar items in EconPapers)
JEL-codes: D22 D43 H25 H26 (search for similar items in EconPapers)
Date: 2024-10
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1467_24

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