Why Pay Our Fair Share? How Perceived Influence Over Laws Affects Tax Evasion
The Journal of the American Taxation Association, Vol. 42, No. 1, Spring 2020
Posted: 5 Sep 2017 Last revised: 18 Mar 2020
Date Written: May 15, 2019
We examine how the relation between taxpayers and their government affects tax evasion. Specifically, we examine how perceived influence over government policymaking affects firms’ decisions to evade tax. We argue that firms are less willing to comply with tax laws when they perceive the influence over their government to be unfavorable to them or the result of an unfair policymaking process. Consistent with this argument, we find that firms evade more tax when other domestic firms have more perceived influence over domestic government policymaking. This suggests a potential negative externality of lobbying: higher tax evasion by other firms. However, government effectiveness or lack of corruption eliminates the positive relation between evasion and perceived influence over policymaking. Our study is the first to document the relation between perceived influence over government policymaking and tax evasion, and our results suggest that limiting domestic firms’ influence over policymaking could help governments decrease tax evasion.
Keywords: Tax Evasion, Tax Morale, Quality of Government, Perceived Influence, Procedural Fairness
JEL Classification: H26
Suggested Citation: Suggested Citation