Corporate tax evasion distorts contracts, reduces efficiency, and risks detection.
The article presents a model of how companies evade paying taxes. Unlike individuals, companies face more challenges when evading taxes. When a company owner chooses to evade taxes, it not only risks getting caught but also affects how employees are compensated. This leads to incomplete contracts with managers, reducing efficiency. Tax evasion increases a company's profits but at the expense of risking detection and decreased efficiency in internal control.