The tax evasion caused by shifting personal expenses to businesses in Portugal is pretty severe. It also happens in U.S. firms, but my intuition is that the magnitude of this corruption is smaller.
I present evidence that firms serve as tax-free consumption vehicles. Drawing on a unique combination of data from an electronic invoicing program in Portugal (e-Fatura), I show that individuals who control firms shift 36% of their monthly personal expenditures to firms and 31% of their household expenditures.
The effects are driven by owner-managers of small closely held firms through expenditure categories on the border between business and final consumption but are widespread among business managers across the whole income distribution.
My results suggest that the government revenue losses due to consumption through the firm amount to 1% of GDP. Reallocating the tax savings and personal expenditures hidden within f irms to the reported household income of business managers increases the Gini by one percentage point and the top 1% income share by half a percentage point.
From David Leite, "The Firm As Tax Shelter" (September 2024).
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