Corporate Taxation and Evasion Responses: Evidence from a Minimum Tax in Honduras

Abstract

We study corporate responses to a minimum income tax, using the universe of corporate tax filings in Honduras. The policy design allows us to separately estimate cost misreporting under profit taxation and the elasticity of reported revenue. Large corporations overreport true costs when taxed on profits. Taxing revenue leads to a substantial decrease in reported revenues: we estimate an elasticity in the range 0.35–1. The elasticity of revenue is attenuated when third-party information on the revenue of firms is available, suggesting misreporting plays an important role. Our results inform trade-offs when broadening tax bases to curb evasion. (JEL H25, H26, K34, L25, O14, O17)