Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion
41 Pages Posted: 5 Mar 2011 Last revised: 1 Jun 2012
Date Written: April 2012
We use firm-level administrative data from Ecuador to study the implications of ‘reverse withholding’ for firms’ tax behavior. Withholding does not affect tax liability of firms, but it may result in a discontinuity in the audit probability around the withholding threshold. Exploiting variation in withholding rates across industries and over time, we find that firms’ profit taxes concentrate near the withholding rate. To explore the link between bunching and evasion, we use data from third party reports on sales and costs. We show that the firms that bunch are more likely to conceal their sales and inflate their costs.
Keywords: Withholding, Reverse Withholding, Firms, Profit Tax, Bunching, Tax Evasion, Ecuador
JEL Classification: H25, H26, O23, O12
Suggested Citation: Suggested Citation