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Cover of: Tax Evasion, Investment, and Firm Activity
Florian Baumann, Tim Friehe

Tax Evasion, Investment, and Firm Activity

Section: Articles
Volume 66 (2010) / Issue 1, pp. 1-14 (14)
Published 09.07.2018
DOI 10.1628/001522110X503352
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  • 10.1628/001522110X503352
Summary
This paper establishes within an intertemporal framework that firm activity is influenced by tax evasion if firms can invest in their long-term competitiveness. Higher investment raises the firm's survival probability, which in turn reduces tax-evasion payoffs, since evaded taxes may also be detected and penalized later on. At the same time, tax evasion in future periods increases future expected profits, making higher investment desirable. Consequently, tax evasion distorts investment, while the latter determines firm activity. Investment in the event of tax evasion may be higher or lower, depending on parameters of tax enforcement.