Tax Non-Compliance in a Globalizing World: Economic Consequences and Governments' Countermeasures

Addressing the efforts by firms and individuals to escape their due taxes, whether through legal or more dubious methods, stands as the central challenge in translating tax policy from theory into practice. These efforts magnify informational asymmetries, foster resource misallocation, and necessitate expensive enforcement and reporting mechanisms. At the forefront of the public discourse is the notion that the strategic use of tax haven jurisdictions erodes government revenues that are essential to sustain core societal functions such as infrastructure, health care, and education. To date, quantifying the extent of revenue losses from (legal) tax avoidance and (illegal) tax evasion has been a key focus in the public finance literature. However, due to the lack of access to appropriate data, economists are only just beginning to understand the real consequences of tax non-compliance beyond forgone revenues. Analyzing the effectiveness and implications of countermeasures has proven difficult for similar reasons. The present Ph.D. thesis helps close this gap. In three essays, I delve into the profit-shifting practices by multinational enterprises (MNEs) and investigate their consequences for domestic labor market dynamics and the efficacy of regulatory measures. To do so, I utilize a unique administrative dataset that links the universe of Norwegian individual and corporate tax returns with information on cross-border bank transfers and firms‘ global ownership networks. The ability of some MNEs to reduce their tax liabilities by relocating profits to tax havens has drawn increasing criticism not only because of the lost tax revenues to high-tax countries, but also because of the inequality this creates in the tax burden across firms. In the first paper, co-authored with Annette Alstadsæter, Julie Brun Bjørkheim and Ronald B. Davies, we demonstrate that this inequality-deepening effect extends to employee pay within profit-shifting firms. Specifically, we exploit matched employer-employee data and variation in the timing of establishing corporate ownership presence in a tax haven to show that profit-shifting firms pay higher wages. This is particularly apparent among service firms where the wage premium is 2%. Further, we find substantial within-firm heterogeneity with high-skill occupations earning higher profit-shifting wage premiums. CEOs experience the most significant gains, with their wages rising by nearly 10%. I confirm adverse labor market consequences of profit shifting in the second paper. I find a gradual slowdown in domestic employment growth by 4% - 6% following ownership entry into a tax haven. The granularity of the data allows me to uncover substantial heterogeneities across industries and worker characteristics, with the negative effects being most pronounced for service-sector employees in the highest occupations. These findings are consistent with a model of tax-motivated offshoring of labor or the notion that MNEs may forgo valuable growth opportunities if they set tax minimization as their prime objective. Given these significant repercussions for the Norwegian economy, the third paper, co-authored with Julie Brun Bjørkheim, assesses the potential of anti-tax-avoidance regulations with a particular focus on the role of tax advisory services in compliance behavior. We first provide evidence that the systematic distortion of intra-firm trade prices is a prevalent phenomenon in Norway. We then leverage the introduction of stricter reporting requirements as a quasi-natural experiment to find a surge in monetary expenses for both external and in-house tax advice in the years after the reform. In comparison, we document modest increases in Norwegian-declared profits and tax payments. Our study is the first to quantify the compliance costs of anti-profit-shifting provisions and highlights the role of the tax advisory industry as the primary beneficiary of tax planning and enforcement.