Why Do Firms Evade Taxes? The Role of Information Sharing and Financial Sector Outreach

Authors

  • THORSTEN BECK,

  • CHEN LIN,

  • YUE MA

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    • Thorsten Beck is with Cass Business School, City University London; Tilburg University, The Netherlands; and CEPR, London. Chen Lin is with the Faculty of Business and Economics at the University of Hong Kong. Yue Ma is with College of Business at City University of Hong Kong. We thank Campbell Harvey (the Editor), an Associate Editor, and three anonymous referees for their very constructive and helpful comments. We also thank Jacques Mélitz, Alex Popov, Vojislav Maksimovic, Steven Ongena, Yuhai Xuan, and seminar participants at Tilburg University, Heriot-Watt University, University of St. Andrews, the Financial Intermediation Research Society (FIRS) Conference 2010 in Florence, and the Annual Bank Conference on Development Economics (ABCDE) 2012 at the World Bank for their helpful comments. We thank Pennie Wong, Kuo Zhang, and Xiaofeng Zhao for excellent research assistance. Lin gratefully acknowledges the financial support from the Research Grants Council (RGC) of Hong Kong (Project No. T31/717/12R).


ABSTRACT

Tax evasion is a widespread phenomenon across the globe and even an important factor in the ongoing sovereign debt crisis. We show that firms in countries with better credit information–sharing systems and higher branch penetration evade taxes to a lesser degree. This effect is stronger for smaller firms, firms in smaller cities and towns, firms in industries relying more on external financing, and firms in industries and countries with greater growth potential. This effect is robust to instrumental variable analysis, controlling for firm fixed effects in a smaller panel data set of countries, and many other robustness tests.

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