Tax Evasion and Firm Survival in Competitive Markets
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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.
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Chapter 6: Conclusion

Flip Palda


The size of the underground economy is a matter of academic dispute. Estimates for any one OECD country can range from 2 per cent to 20 per cent. Whether the underground economy is a matter for concern depends in part on whether this economy destroys resources. Researchers have catalogued how the underground economy may enhance a nation’s productivity by allowing citizens to produce and consume beyond the grasp of the tax collector. Other researchers have found that the underground economy may force an excessive burden of taxation on the legitimate economy and so cramp government’s efforts to raise revenues and provide the public goods needed for economic growth. The present book has added to the findings of this second group of researchers by highlighting a previously under-emphasized cost of the underground economy. This cost arises when efficient producers who are not good at evading taxes or regulations are ousted from the market by producers who are good evaders but poor producers. The difference in the costs of the ousted efficient and surviving inefficient firms is the displacement deadweight loss from the underground economy. Displacement loss arises in a variety of circumstances. The analysis of tax evasion, which has been the major focus of this book, showed that even under the innocuous assumption that there is no correlation between evasive and productive abilities, displacement losses could rival traditional Harberger triangle losses. The logic of modelling displacement losses of tax evasion carries over almost perfectly to firm-specific investment grants. In Chapter 3...

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