Who Benefits from Tax Evasion of Politically Connected Firms?

Abstract

We study the impact of hiring former government officials on firms’ tax evasion using a unique administrative employee-employer matched data from Moscow, Russia. We find that firms hiring former top-level city government officials experience increased tax evasion: reported salaries of the firms’ employees decrease, while the actual compensation increases. Using instrumental variables based on local reorganizations in Moscow government, we show that these effects have causal interpretation. Importantly, the “benefits” of tax evasion accrue not only to the top-managers but are widely shared among other firms’ employees, which likely makes those practices difficult to uproot.