Tax Evasion and Firm Survival in Competitive Markets

Tax Evasion and Firm Survival in Competitive Markets

Flip Palda

Tax Evasion and Firm Survival in Competitive Markets illustrates how a firm with high production costs but which is easily able to evade taxes may displace from the market a company with low production costs but poor tax evasion capabilities. The difference in production costs between the inefficient survivor and the efficient loser is termed by the author the ‘displacement loss from taxation’, and rivals in size the Harberger triangle loss from taxation.

Chapter 1: Introduction

Flip Palda

Subjects: economics and finance, public choice theory, public finance, politics and public policy, public choice

Extract

Shell Brasil, the Brazilian subsidiary of the Anglo-Dutch oil group, is to sell 285 service stations and six fuel deposits to Agip do Brasil, the local subsidiary of Eni, the Italian group. Shell said the move was part of efforts to concentrate on the most profitable parts of its business in Brazil, but it is understood to have sold the stations, in remote central and western regions of the country, after failing to compete with smaller distributors undercutting bigger companies by evading taxes. (Financial Times of London, 25 February 2000, page 18) In 1997 I visited the Czech Republic and got to know one of the main wholesalers of cut flowers. He made his living by importing flowers from Holland and selling them to hotels and flower stands across the Czech Republic. I learned from him how a Dutch auction works, how purchasers rate the quality of flowers, and the how wholesalers and retailers guess at demand and race against the clock to sell flowers before they wilt. My discussion with the wholesaler filled a chasm in my practical education about markets left by the theoretical excesses of graduate school. These discussions also showed me that there can be distance between what producers on the front line of markets find to be a market failure, and what professors of economics believe hinder markets. The wholesaler’s hair was greying because the government did not apply taxes evenly to him and his competitors. Rogue merchants would travel to Holland in small unrefrigerated...