Tax Evasion and Growth: Evidence from Russia

Abstract

This paper examines the effect of tax evasion on firm growth using a unique set of data that contains 236 million banking transactions of 1.7 million Russian firms over the 2003 to 2004 period. First, income diversion in Russia expressed in gross domestic product (GDP) was estimated to be 11.3% in 2003 and 13.1% in 2004, which corresponds to tax evasion of 4.6%-5.0% and 5.4%-5.8% of GDP, respectively. Second, a direct measure of tax evasion for 46,965 companies was constructed. On average, firms were found to divert 5.7% (31.2%) of their revenue (assets) per year. Next, the paper documents a negative relation between tax evasion and firm growth. One standard deviation increase in tax evasion is associated with a 1.7%-2.0% (0.7%-0.9%) decrease in the growth of revenue (assets). Finally, several possibilities that might explain this result were examined, and tax evaders were found to face restricted access to capital markets. One standard deviation in tax evasion corresponds to a 57-191 - basis point increase in debt interest rate. Tax evaders also were found to experience decline in productivity.