Tax Evasion and Tacit Collusion

Abstract

This article analyzes the interaction between tax evasion and tacit collusion. We show that the possibility of evading taxes generally influences the incentives to form a cartel. We establish that whether tax evasion increases or decreases the set of circumstances allowing stable collusion depends on (1) the relation between the benefits of tax evasion and legal after-tax profits and (2) effective enforcement of antitrust laws. In considering variations in tax enforcement and antitrust enforcement, we find that stricter tax enforcement may actually increase the level of tax evasion, as it may promote the cartelization of industries. In contrast, stricter antitrust enforcement lowers incentives for cartelization, thereby possibly reducing tax evasion at the same time.