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

Abstract

Informality is a wide-spread phenomenon across the globe. We show that firms in countries with better information sharing systems and greater financial sector outreach evade taxes to a lesser degree, an effect that is stronger for smaller firms, firms in smaller cities and towns, and firms in industries relying more on external financing, with higher liquidity needs and with greater growth potential. However, it is variation in firm size that dominates firm variation in location and industry variation in explaining cross-firm and cross-country variation in tax evasion. This effect is robust to controlling for an array of other measures of the financial and institutional environment firms face. The effect is also robust to controlling for fixed firm effects in a smaller panel dataset of Central and Eastern European countries many of which introduced credit registries or upgraded them in the early 2000s.

Keywords: Formal and informal sector, tax evasion, financial sector development

JEL Classification: E26, G2, H26, O17