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 3: Are Subsidies Evaded Taxes?

Flip Palda

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


In the preceding chapter I suggested that tax evasion does its harm by allowing producers who are good at evading taxes but poor at making a product to oust more efficient producers who lack the ability or inclination to evade taxes. The harm would not have arisen had everyone evaded taxes with equal aplomb. The insights of that chapter carry over to any government rule that some producers violate and other producers obey. In this chapter I propose that a business that asks for and receives a subsidy from the state may do the same harm to society as a business that evades taxes. On the surface a subsidy does not look like tax evasion. Bureaucrats and politicians grant subsidies as representatives of the people. Bureaucrats and politicians do not grant businesses leave to evade taxes. Such a distinction is of little importance to understanding the welfare costs of subsidies. If a business can get government money because it is good at talking to bureaucrats rather than being good at stamping out a product, that business may displace a more efficient business that does not have the wit to lobby government. The difference in costs between the two businesses is the same sort of displacement deadweight loss discussed in the previous chapter. To claim that subsidies are evaded taxes in disguise one must believe that subsidies are granted outside the rule of law. The rule of law prevails when elected representatives refrain from using the state’s power outside the limits...

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