Indirect Taxation, Tax Evasion and Profits

Abstract

In a duopoly with differentiated products under price competition, this paper analyses the frms’ tax compliance behaviour in the presence of tax evasion to challenge the conventional wisdom that indirect taxes penalise profts. In contrast to the preceding literature, it is shown that indirect taxes can increase frms’ profts. The appearance of this unconventional fnding is more likely when there exists a suffcient competitive pressure in the industry and the effort for detecting evasion is not too strong.