Failing to ring up sales: tax evasion by a cash-intensive business

Abstract

A cash-intensive business is a firm that receives a large portion, if not all, of its receipts in cash, usually in return for a large volume of small-value sale transactions. Tax agencies often require a cash-intensive business to record its cash receipts on an electronic cash register and may conduct a trial purchase to verify that the cash-intensive business complies with this regulation. If the cash-intensive business fails to do so, the tax agency is likely to disqualify the cash register as a reliable source for determining tax liability, assessing the cash-intensive business’ actual volume of sales using some approximation method. The present article models the cash-intensive business’ joint evasion–employment decision, focusing on the main questions addressed in the literature on the tax-evading firm: does the firm's decision to evade taxes affect its employment level and how would an increase in the profit tax rate affect its optimal evasion? While the literature concludes that the decision to evade taxes does not affect the firm's level of employment and that an increase in the profit tax rate reduces the amount of tax evaded, the present article finds that the optimal level of employment increases with the decision to evade taxes and that the amount evaded increases with the profit tax rate.