Why Pay Our Fair Share? How Perceived Influence Over Laws Affects Tax Evasion
Summary (3 min read)
- The authors examine how the relation between taxpayers and their government affects tax evasion.
- Specifically, the authors examine how perceived influence over government policymaking affects firms’ decisions to evade tax.
- Thus, the authors extend this literature to incorporate the role of perceived influence over government policymaking on tax evasion.
- Because of limitations to deterrence models of tax evasion (see e.g., Alm, McClelland, and Schulze 1992b), Slemrod (2018) and Alm (2019) call for additional research to better understand non-deterrence explanations for tax compliance.
- The firm is unlikely to always succeed in its efforts to influence policy, potentially limiting the firm’s perception of its own influence over policymaking.
- The authors sample starts with a dataset of confidential firm-level survey responses provided by the World Bank that includes information from the World Bank’s Private Enterprise Surveys for 2002-2004.14.
- The survey is a written survey conducted in a room that contains both a World Bank representative as well as a member of the local private sector such as the head of the chamber of 14 The World Bank Private Enterprise Survey data was accessed by one of the authors through a confidentiality agreement with the World Bank.
- The World Bank representative makes sure the survey is administered consistently across countries and the local private sector representative is there to engender the respondent’s trust.
- The authors exclude observations with missing information, which leaves us with a final merged sample consisting of 7,347 firm-year observations from 37 countries.
Measurement of Tax Evasion
- There are several reasons that this potential measurement error will not bias their results (Beck et al. 2014; Williams 2017).
- Finally, as previously discussed, prior research finds that responses to World Bank surveys are directly associated with measurable outcomes in several areas including corruption, expropriation, protection of property rights, corporate financing, operating obstacles, tax evasion, investment, performance, and growth (Beck et al. 2014).
- The authors utilize firms’ responses to the World Bank surveys to create their variable of interest related to firm-level tax evasion, Tax Evasion Ratio.
- Tax Evasion Ratio is calculated as one minus the answered numerical response to the survey question on tax evasion.
Measurement of Perceptions of Influence over Laws and Regulations
- The authors measure of firms’ perceptions of influence over laws and regulations come directly from questions asked of participants during the World Bank survey.
- Perceived influence is higher for other domestic firms, foreign firms, and foreign development agencies, with the average level falling just above a minor influence (coded one).
- Table 2, Panel B, presents the average of Tax Evasion Ratio and each of the four variables of perceived influence over government policymaking by industry.
- The authors find significant variation in the level of tax evasion across industries, with the highest level of evasion in the agricultural industry (48.8 percent) and the lowest level in the telecommunications industry (7.4 percent).
- To investigate the relation between perceptions of various parties’ influence over local laws and regulations and the extent of firm-level tax evasion, the authors run several empirical tests.
- 21 Influence_Measures takes the form of one or all of their measures of the firm’s perception of various parties’ influence over local laws and regulations (Own Firm 21 The authors dependent variable, Tax Evasion Ratio, is by construction bounded at zero and one, a situation Wooldridge (2010) refers to as a ‘corner solution outcome.’.
- Tobit models are commonly used in accounting research for corner solution outcomes (e.g., impairment percentage; Stein 2018).
- The authors model includes several firm-level control variables that could potentially be linked to both tax evasion and the firm’s perception of various parties’ influence over laws and regulation.
- The authors continue to include country fixed effects, which capture country-level items like the maximum statutory corporate tax rate.
- To gain initial insight into the effect of perceived government influence on tax evasion, the authors analyze the correlations between their variable of interest, Tax Evasion Ratio, and firms’ perceptions of various parties’ influence over local laws and regulations.
- The correlations are presented in Table 4, with bolded coefficients indicating significance at the 10 percent level.
- The authors also find a significant positive correlation between a firm’s tax evasion and its perception of its own influence over government policy (ρ = 0.020).
- The authors caution that these univariate correlations do not control for potentially confounding relations 25 While the United States is not in their sample, this 23 percent evasion rate somewhat similar to the 18.3 percent non-compliance rate estimated by the IRS and discussed earlier.
- The authors also observe a significantly positive correlation between the firm’s perception of its own influence and its perception of the influence of other domestic firms (ρ = 0.381) and foreign firms (ρ = 0.137).
- The authors results to this point offer preliminary evidence that a firm’s perception of who influences government policy can play a significant role in the decision to evade taxes.
- Columns 1 through 4 present their estimations that include Own Firm Influence, Other Domestic Firms’ Influence, Foreign Firms’ Influence, and Intl. Development Agency/Foreign Governments’.
- The authors find that the perceived influence of other domestic firms (column 2, coefficient of 0.022, tstatistic of 2.62), foreign firms (column 3, coefficient of 0.014, t-statistic of 3.33), and international development agencies and foreign governments (column 4, coefficient of 0.011, tstatistic of 2.28) are each positively associated with tax evasion.
- Further, as discussed previously, survey respondents answer survey questions with strict anonymity using indirect questioning, which alleviates some concern regarding this potential bias.
- 28 Inferences from the results presented throughout the remainder of the paper are consistent if the authors ignore these multicollinearity issues and include all country-level variables in their empirical estimations.
Additional Analysis: Government Effectiveness
- As noted above, the authors argue and find that certain parties’ influence on government policymaking can make taxpayers view the policymaking process as less fair.
- Thus, as expected, having an effective government fully mitigates the association between perceived influence over policymaking and tax evasion.
- Using the CPI index, the authors construct the variable High Anti-CPI, which represents countries with the least amount of government corruption.
- Table 7 presents the results for own firm’s influence (column 1), other domestic firm’s influence (column 2), foreign firm’s influence (column 3), and international development agencies and foreign government’s influence (column 4) separately, with column 5 presenting the results when including all influence measures combined.
- In sum, these results suggest that while the perceived influence of other domestic firms on government policymaking is associated with higher tax evasion, this effect does not exist when the firms’ government is perceived as more effective or less corrupt.
Additional Analysis: Statutory Tax Rates
- As an additional analysis, the authors assess whether the relation between tax evasion and influence over government policymaking is affected by tax rates.
- Thus, the authors explore whether and to what extent the association between tax evasion and government influence differs based on the existing statutory tax rate.
- Slemrod, J., M. Blumenthal, and C. Christian.
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Q1. What are the contributions in this paper?
The authors examine how the relation between taxpayers and their government affects tax evasion. Specifically, the authors examine how perceived influence over government policymaking affects firms ’ decisions to evade tax. This suggests a potential negative externality of lobbying: higher tax evasion by other firms. Their results suggest that limiting domestic firms ’ influence over policymaking could help governments decrease tax evasion.