Can the optimal fiscal policy counteract corporate tax evasion without harming job creation?

Purpose This paper studies the relation between corporate tax evasion, job creation and optimal fiscal policy. Job creation depends on firms’ profits since firms open (“create”) new jobs when profits increase. In turn, firms’ profits depend on incentives (rewards) and disincentives (penalties) to comply with tax rules. Hence, any fiscal policy to combat tax evasion also has repercussions on job creation. Design/methodology/approach This paper is both theoretical and empirical. From a theoretical point of view, a modified and extended version of the search and matching model of the labor market is used. In this framework, moreover, the welfare function of workers and firms is closely related to the job creation condition. Empirically, a panel analysis of a system of two simultaneous equations that covers 54 countries (both developed and developing) and four years (2018–2021) is carried out. Findings The paper finds that anti-tax evasion policies should be related to job creation policies. Also, anti-tax evasion and job creation policies change according to the extent of tax evasion in the economy. Precisely, when tax evasion is widespread, a lower tax burden (tax cuts or provision of fiscal rewards) requires tighter tax audits, whereas, where most people comply with tax rules, a decrease in tax audits is possible. Practical implications The empirical analysis supports the model-generated theoretical relationships. Eventually, therefore, the optimal fiscal policy suggested by this work can counteract corporate tax evasion and, at the same time, reduce the firm’s tax burden, thus promoting job creation. Originality/value As far as we are aware, this is the first paper that considers the close and direct link between fiscal policy, corporate tax evasion and job creation.