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The market externalities of tax evasion

Author

Listed:
  • Irene Di Marzio

    (Bank of Italy)

  • Sauro Mocetti

    (Bank of Italy)

  • Enrico Rubolino

    (University of Lausanne)

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.

Suggested Citation

  • Irene Di Marzio & Sauro Mocetti & Enrico Rubolino, 2024. "The market externalities of tax evasion," Temi di discussione (Economic working papers) 1467, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1467_24
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1467/en_tema_1467.pdf
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    More about this item

    Keywords

    tax evasion; market competition; preferential tax regimes;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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