Shades of Grey: Business Compliance with Fiscal and Labour Regulations

Katherine Cuff, Steeve Mongrain and Joanne Roberts
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Joanne Roberts: University of Calgary

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: Firms face many legal regulations, including corporate tax laws and labour laws. There are many ways for firms to evade these legal requirements. Firms may employ workers informally to skip out on safety or health standards or to avoid paying payroll taxes. Firms may also misreport sales transactions to minimize sales or business tax liabilities. Much of the literature examining firm behaviour assumes that a firm's decision to evade one type of regulation (such as labour regulation) is perfectly linked to the decision to evade another (such as corporate income taxes). In this paper, we separate these two evasion decisions and allow firms to decide whether to evade labour market regulations (including the payment of payroll taxes) independently from their decisions to evade business taxes. We find that the design of the tax system and firm entry decisions generate both positive and negative correlations between these two evasion decisions. We characterize the firms’ optimal entry and evasion behavior and derive the government's optimal tax policies. A pure pro t tax system with no payroll tax system, which is optimal in absence of business tax evasion, is no longer desirable when such evasion must be considered.

Keywords: Informal Labour Market; Labour Regulation; Tax Evasion; Payroll taxes; Corporate Income Taxes (search for similar items in EconPapers)
JEL-codes: H26 H32 K42 (search for similar items in EconPapers)
Pages: 42
Date: 2017-03
New Economics Papers: this item is included in nep-bec, nep-iue and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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