Tax Evasion and Competition
24 Pages Posted: 2 Oct 2007
Date Written: September 2007
Using a Cournot oligopoly model with an endogenous number of firms and evasion of indirect taxes, this paper shows that more intense competition may have the negative side-effect of eroding tax revenues by increasing tax evasion. This will be the case if market entry costs decrease. A similar result will hold if marginal production costs fall and demand is either weakly concave or convex and inelastic. The desirable result of more competition, less evasion and higher tax revenues will be obtained if (a) marginal production costs fall and demand is convex and elastic or (b) the demand elasticity increases.
Keywords: competition, firms, market power, tax evasion, tax revenues
JEL Classification: H25, H26, L13, L51
Suggested Citation: Suggested Citation