Tax evasion and strategic behaviour of the firms

Abstract

The purpose of this paper is to analyze the optimal tax evasion decision in the context of an oligopolistic market with quantity setting firms. It is shown that the optimal amount of tax evasion for each firm depends not only on the degree of collusion in the market but also on the relative market shares of the firms; increasing collusion, however, leads to a larger amount of tax evasion in the market. It is proved that, with constant probability of detection, separability between shifting and evasion decisions holds, whereas it might fail to hold if the probability of detection is a function of the declared tax base. In this case, a probability function which decreases with the declared tax base will lead to lower evasion and lower shifting.