Evasion vs. real production responses to taxation among firms: bunching evidence from Argentina

This paper is part of the master thesis written with a view to obtaining the academic degree of Master 120 en Sciences Économiques, Finalité Approfondie in the Ecole d’économie de Louvain, Université catholique de Louvain and in the Département des Sciencies économiques, Université de NamurA key idea in public economics is that optimal tax policies and tax instruments can ensure production efficiency even in second-best environments. This theoretical prediction has been widely accepted and put into practice in developed and developing countries. Yet, it has been derived from models that ignore tax evasion. Once enforcement constraints are acknowledged, some studies suggest that –contrary to the theoretical prediction – production efficiency is no longer 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 show that the asymmetric bunching in Argentina represents intensive and extensive margin responses. Incorporating turnover evasion in an optimal tax model, we find that in Argentina the trade-off is not as clear as in Pakistan because bunching could be the result of less complianc