Tax Evasion and Productivity: Do Firms Escape Epl Through Informality? Evidence from a Regression Discontinuity Design
Abstract: Tax compliance has costs and benefits which may depend on the institutional environment in which firms operate. The relationship between tax evasion and productivity is not always unambiguous and firm size can be a crucial issue whenever firms are constrained by the institutional framework in a measure that depends on their size. We argue that firms may respond to string employment protection legislation through accrued informality thus (partially) offsetting the negative effect of tax evasion on productivity. We exploit the Italian dismissal legislation imposing higher firing costs for firms with more than 15 workers and show that tax evasion reduces job turnover for firms above the 15 workers threshold; furthermore, while the overall effect of tax evasion on firms' productivity is negative, the differential effect for firms above the threshold as compared to smaller firms is positive and significant.