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 4: Tax Evasion Analysis Extended to Regulation Evasion: The Case of the Minimum Wage

Flip Palda

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


Government has the power to tax and to regulate. Economists often see taxes and regulations as brothers. Both instruments allow government to influence how people behave, both allow government to redistribute income, and both carry with them a deadweight loss. In the last two chapters I have shown that a deadweight loss previously unstudied by the public finance literature needs to be reckoned with. It is the loss that comes when inefficient firms who are good at evading taxes crowd out efficient firms that are poor tax evaders. In the present chapter I extend this insight to regulations that create shortages of output. A simple case to understand of displacement loss resulting from a regulation is that of fishermen who receive quotas from government. Each boat gets a maximum allowable catch. If government does not assign the most quota to the most efficient boats, inefficient boats will thrive simply because they have quotas. Efficient boats will not be able to push their inefficient rivals from the seas. If efficient fishermen were allowed to buy quotas from inefficient fishermen deadweight losses from displacement could be avoided. Suppose the market price were $200 per tonne of fish. An inefficient fisherman with costs of $100 per tonne of catch would be willing to sell his quota for a tonne to the efficient fisherman who can catch a tonne for $50. The sale price could be anything between $100 and $150. The total cost to society of catching fish would fall by $50 (the...

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