Tax Evasion, Disclosure and Participation in Financial Markets: Evidence from Brazilian Firms

Abstract:     
This paper addresses uses survey data and qualitative evidence from Brazilian manufacturing firms to examine the scale and consequences of tax evasion at the enterprise level. It discusses the costs and benefits of under-reporting from the entrepreneur's perspective and provides evidence that evasion of sales tax is only weakly correlated with firm size. The paper then shows that medium-sized and large manufacturing firms that evade taxes are less likely to undergo an external audit and more likely to be asked for informal payments by tax officials. It also argues that they may be less likely to participate in markets for equity finance.

Keywords: informality, capital markets, tax evasion, Brazil

Working Paper Series