How are the tax evasion savings distributed?

Vincent Tena, Juan Imbet and Marcelo Ortiz
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Vincent Tena: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Juan Imbet: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: We use a continuous-time moral hazard model in which a firm owner contracts an agent to reduce corporate tax expenses in an institutional setting with random audits by tax authorities. The model distinguishes between legal tax avoidance, characterized by a lack of audit risk yet persistent moral hazard, and illegal tax evasion, which introduces audit risk and contingent penalties in the event of detection. We show that a relevant fraction of the savings are paid to the manager in charge of the tax strategy, and how different institutional features influence this fraction, the intensity of tax evasion over time, and the overall tax revenue collection. Further, we show that the optimal contract for tax evasion generates a corporate Laffer curve in a setting without investment and managerial cash diversion.

Date: 2024-05
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Published in 40th International Conference of the French Finance Association (AFFI), May 2024, Lille, France

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Related works:
Working Paper: How Are the Tax Evasion Savings Distributed? (2024)
Working Paper: How are the tax evasion savings distributed? (2024)
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