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Financial Constraints and Firm Tax Evasion

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

No 1901, Working Papers from Tulane University, Department of Economics

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 and credit 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)
New Economics Papers: this item is included in nep-cfn, nep-eur, nep-iue, nep-pbe, nep-pub and nep-tra
Date: 2019-04
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