Cash Businesses and Tax Evasion

32 Pages Posted: 11 Sep 2008 Last revised: 14 Nov 2012

Susan C. Morse

University of Texas at Austin - School of Law

Stewart Karlinsky

San Jose State University - Donald and Sally Lucas Graduate School of Business

Joseph Bankman

Stanford Law School

Date Written: September 8, 2008

Abstract

This paper offers interview data on the tax compliance behavior of small cash businesses. We find that such businesses systematically underpay income, employment and sales taxes through income underreporting. The results show that participation in a parallel cash economy facilitates tax evasion and that cash business owners seek out sympathetic tax preparers. We also find that norms and opportunity, but not equity or tax law complexity, strongly influence such decisions to underreport income. The behavior patterns indicated by our data suggest specific policy tactics in the effort to close the tax gap.

Keywords: tax compliance, tax evasion, small businesses

JEL Classification: H24, H25, H26

Suggested Citation

Morse, Susan C. and Karlinsky, Stewart and Bankman, Joseph, Cash Businesses and Tax Evasion (September 8, 2008). Stanford Law & Policy Review, Vol. 20, 2009. Available at SSRN: https://ssrn.com/abstract=1265282

Susan C. Morse (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

Stewart Karlinsky

San Jose State University - Donald and Sally Lucas Graduate School of Business ( email )

One Washington Square
San Jose, CA 95192-0066
United States

Joseph Bankman

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-725-3825 (Phone)
650-725-7663 (Fax)

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