Labour, Volume 31, Issue 3, 2017
Tax evasion is low in many countries because third-party reporting makes employees unable to cheat. Why do not employees collude with their employer to evade taxes or evade as self-employed? We explain this puzzle in a model in which employees have both options. A trade-off between large-scale efficient production and tax evasion implies that tax evasion per employee is decreasing in firm size. The model predicts that there is a gap between the individually and the collectively optimal evasion in firms and that this gap is increasing in firm size. Using survey data, we find support for both predictions.