Evasion vs. real production responses among firms to taxation: Bunching evidence from Argentina
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- The centerpiece in public economics is that optimal tax policies and tax instruments should promote production efficiency even in second-best environments. This theoretical prediction has been widely accepted in developed and developing countries, although it has been derived from models that ignore tax evasion. Once enforcement constraints are acknowledged, we show that contrary to the theoretical prediction, production efficiency is not anymore the centerpiece of the model while instead revenue efficiency becomes more relevant. This paper analyzes empirically such trade-off between revenue and production efficiency in the choice of tax instruments in Argentina. We use a production inefficient tax policy, the simplified tax regime, which affects firms’ behavior on compliance and real output. Using the bunching approach and administrative tax data covering all corporate income tax returns for the years 1997-2011, we find that medium firms cluster around a profit rate of 0.09 which might suggest evidence of a behavioral response to the policy.