Tax evasion,social norms,and economic growth

We propose a theoretical model to account for the negative relationship between tax evasion and economic development. More precisely, we integrate tax morale into a dynamic OLG model of tax evasion. Tax morale is modeled as a social norm for tax compliance. We show that accounting for such nonpecuniary costs of evasion may explain (a) why the share of evaded taxes over GDP decreases when countries grow and (b) that tax morale is positively correlated with the level of GDP per capita. Finally, a higher tax rate increases aggregate evasion and the number of evaders when taxpayers decisions are interdependent.     

PUBLIC INVESTMENT,TAX EVASION,AND THE WELFARE EFFECTS OF A TARIFF REFORM

Contrary to the case considered in literature, the experience of developing countries indicates that the tariff reforms have not been revenue neutral due to the heavy dependence of developing countries on trade taxes and pervasive tax evasion. In contrast to the plausibility of a welfare loss shown by the current literature, when the adverse effect of the loss of tariff revenue on public investment is factored in, the welfare outcome of the tariff reforms of past few decades turns out to be much more pessimistic. The constraints imposed by tariff dependence and tax evasion imply that future tariff reforms in these countries should be undertaken after strengthening their domestic tax system and augmenting the ability of their governments to fight tax evasion. For countries of sub‐Saharan Africa, where such reforms are likely to be concentrated, this would need planning and capacity building over a longer time horizon. (JEL D61, D62, F13, H26)     

The Political Economy of the (Weak) Enforcement of Indirect Taxes

The objective of this paper is to understand the determinants of the enforcement level of indirect taxation in a positive setting. We build a sequential game where individuals, who differ in their willingness to pay for a taxed good, vote over the enforcement level. Firms then compete à la Cournot and choose the fraction of sales taxes to evade. We assume in most of the paper that the tax rate is set exogenously. Voters face the following trade‐off: more enforcement not only increases tax collection but also increases the consumer price of the goods sold in an imperfectly competitive market. We obtain that the equilibrium enforcement level is the one most preferred by the individual with the median willingness to pay, that it is not affected by the structure of the market (number of firms) and the firms’ marginal cost, and that it decreases with the resource cost of evasion and with the tax rate. We also compare the enforcement level chosen by majority voting with the utilitarian level. In the last section, we endogenize the tax rate by assuming that individuals vote simultaneously over tax rate and enforcement level. We prove the existence of a Condorcet winner and show that it entails full enforcement (i.e., no tax evasion at equilibrium). The existence of markets with less than full enforcement then depends crucially on the fact that tax rates are not tailored to each market individually.     

Timing tax evasion

Standard models of tax evasion implicitly assume that evasion is either fully detected, or not detected at all. Empirically, this is not the case, casting into doubt the traditional rationales for interior evasion choices. I propose two alternative, dynamic explanations for interior tax evasion rates: First, fines increasing in the duration of an evasion spell, implying that the expected costs of evasion increase convexly with the time spent non-reporting, while the benefits increase linearly. Second, different vintages of income sources subject to aggregate risk and fixed costs when switched between evasion states. The dynamic approach yields a transparent representation of revenue losses and social costs due to tax evasion, novel findings on the effect of policy on tax evasion, and a tractable framework for the analysis of tax evasion dynamics.     

Tax evasion by tax deferment: Sham litigation with an informal credit market

We show theoretically how tax evasion is facilitated by informal credit market through tax deferment. Our model is empirically based. Using sham litigation, tax evaders earn a higher rate of return than the stipulated penalty rate for tax evasion while the government loses tax revenue. We propose an upfront part–payment of the disputed amount of tax as a solution to the form of tax evasion we describe.     

Two comments on tax evasion

A simple theoretical model of tax evasion behaviour is used to analyse whether a large fine (with small probability of detection) is a more powerful deterrent to tax evasion than a high probability of detection (with a small penalty). The effect of a higher tax rate on the amount of tax escaping the tax collector is also examined.     

Corporate tax evasion: The case for specialists

We analyze the role of accounting specialists who help corporations evade/avoid taxes in a game of incomplete information played by a tax authority, corporate taxpayers, and an accounting specialist. In addition to a full equilibrium characterization, we establish that (i) marginal changes in enforcement are not effective when evasion/avoidance is pervasive; (ii) fines on firms as opposed to specialists are more effective in such situations; (iii) reducing auditing costs and increasing “creative accounting” costs are effective in curbing evasion when tax compliance is relatively high.     

Optimal environmental taxation and enforcement policy

We study the optimal environmental taxation and enforcement policy when (i) the regulator does not know the firms’ abatement costs, (ii) penalties for tax evasion are limited, and (iii) monitoring of pollution is costly. We show that the threat of being audited alter the usual firms’ incentives to over-estimate their abatement costs. In particular, depending on the firms’ abatement costs, the optimal policy may involve over or under-deterrence compared to the full information outcome. We then investigate the properties of a pollution standard. We show that this policy comes close to an environmental tax once the economic incentives of the accompanying enforcement policy are considered.     

GENDER AND PUBLIC ATTITUDES TOWARD CORRUPTION AND TAX EVASION

The topics of corruption and tax evasion have attracted significant attention in the literature in recent years. We build on that literature by investigating empirically: (1) whether attitudes toward corruption and tax evasion vary systematically with gender and (2) whether gender differences decline as men and women face similar opportunities for illicit behavior. We use data on eight Western European countries from the World Values Survey and the European Values Survey. The results reveal significantly greater aversion to corruption and tax evasion among women. This holds across countries and time, and across numerous empirical specifications. (JEL H260, D730, J160, Z130)     

Anticorruption reforms,tax evasion,and the role of harassment

We examine the impact of anticorruption reforms on tax evasion when corruption and potentially harassment are endemic among tax auditors. We find that the threat of harassment may counterintuitively boost the impact of such anticorruption reforms on tax evasion and also eliminate corruption. Specifically, a moderate anticorruption policy can discontinuously reduce tax evasion to a level even below that under no corruption. Further strengthening of such policy can nonetheless prove counterproductive and increase tax evasion. On the contrary, in the absence of harassment, a moderate anticorruption reform induces higher tax evasion and sustenance of bribery. In this case, only a large reform can reduce tax evasion and eliminate corruption.     

Tax evasion and labor markets

Concern with revenue losses, inequities, and inefficiency that may result from tax evasion has produced a number of formal analyses of taxpayer dishonesty. Most of this work has concentrated on the behavior of individual evaders and has ignored the interaction between evasion and labor market equilibrium. To remedy this, our analysis uses a model with two labor markets — which differ in the potential for evasion — to examine how changes in various tax parameters affect evasion and labor market equilibrium. We also simulate the effect of switching from a proportional to a progressive tax system in order to evaluate the well-known claim that progressivity encourages evasion.     

THE FISCAL DIVIDEND MYTH OF AN INCOME/GST TAX SWITCH*

Reaping a windfall fiscal dividend from the taxation of the ‘underground’ economy's expenditures on ‘legitimate’ commodities is often seen as a significant advantage for a goods and services tax (GST) over an income tax. This claim ignores the changes in prices in the underground economy which would arise from the introduction of a GST. Employing a general equilibrium model which allows for tax evasion, we show that any ‘dividend’ arising from a change in the income tax/GST mix is equivalent to a rise in the income tax rate without a GST.     

Nonseparable preferences and optimal social security systems

In this paper, we consider economies in which agents are privately informed about their skills, which evolve stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation. In this environment, we derive a generalized version of the Inverse Euler Equation and use it to show that intertemporal wedges characterizing optimal allocations of consumption can be strictly negative. We also show that preference nonseparabilities imply that optimal differentiable asset income taxes are necessarily retrospective in nature. We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement. The average asset income tax in this system is zero.     

The Big Bang: Tax Evasion After Automatic Exchange of Information Under FATCA and CRS

ABSTRACT

After decades of ineffective attempts to fight tax evasion, the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) recently implemented the first encompassing international exchange of tax-related information on an automatic basis. This is an important development because tax evasion contributes to rising socio-political inequality and political sovereignty losses. This article assesses the treaties’ impact on tax evasion by conducting a difference-in-difference analysis of cross-border asset data. The results show that the treaties are successful. Household assets in tax havens that are not hidden behind corporate identities are estimated to be 67 per cent lower than they would have been without automatic exchange of information. Furthermore, this reduction is not offset by an increase in treaty circumvention using identity concealment or asset shifting to non-compliant jurisdictions. FATCA and CRS thus implement the first effective international cooperation against tax evasion. The results imply that political globalisation is capable to mitigate the political sovereignty losses and rise of inequality caused by economic globalisation.     

Growth, habit formation, and catching-up with the Joneses

When habits are introduced multiplicatively in a capital accumulation model, the consumers’ objective function might fail to be concave. In this paper, we provide conditions aimed at guaranteeing the existence of interior solutions to the consumers’ problem. We also characterize the equilibrium path of two growth models with multiplicative habits: the internal habit formation model, where individual habits coincide with own past consumption, and the external habit formation (or catching-up with the Joneses) model, where habits arise from the average past consumption in the economy. We show that the introduction of external habits makes the equilibrium path inefficient. We characterize in this context the optimal tax policy.     

Optimal taxes on wealth and consumption in the presence of tax evasion

This article incorporates tax evasion into an optimum taxation framework with individuals differing in earning abilities and initial wealth. We find that despite the possibility of its evasion a tax on initial wealth should supplement the optimal nonlinear income tax, given a positive correlation between initial wealth and earning abilities. Further, even if income and initial wealth are taxed optimally, it is still desirable to levy a tax on commodities, though it can be evaded as well. Thus, our result provides a rationale for a comprehensive tax system. Optimal tax rates on commodities differ in general, however for the special case of a uniform evasion technology equal rates are optimal if preferences are homothetic and weakly separable.     

Rationalizing Australian Taxation Revisited*

This paper reviews the author's (1971) tax rationalization proposal to examine whether a tax simplification scheme eliminating minor transaction taxes and reducing heavy reliance on personal income tax by introducing a general consumption tax continues to have merit for Australian tax reform. The first part of the paper points to increases in avoidance and evasion as a major change perceivable in Australian taxation between the 1960s and the 1980s and indicates other important changes that have occurred. Section II presents an equity and simplicity case for general indirect consumption taxation supplemented by personal income and wealth taxes. Section III discusses the inter-governmental financial relations implications of the proposed rationalization. The paper concludes that in the light of events in 1983 such rationalization proposals suitably modified continue to have merit.     

Tax Amnesties In A Dynamic Model of Tax Evasion

We present a dynamic model of tax evasion, where tax liabilities last for two periods and the probability of an inspection decreases with the sum of taxes evaded this period plus taxes evaded last period. We show that a tax amnesty that pardons more than the evasion penalties (an extensive amnesty) can temporarily improve compliance. Whenever the inspection technology improves, steady state compliance also improves, but the economy takes time to transit from one steady state to the other. We show that an amnesty may accelerate this transit, or even make it instantaneous if the amnesty is extensive enough.     

The co-evolution of tax evasion,social capital and policy responses: a theoretical approach

The dynamic model presented in this paper intends to account for the evidence, which appears to be particularly significant for Italy, of the incidence of tax evasion in a certain region being negatively correlated with the level of social capital existing in that region. Besides including social capital among the determinants of tax evasion, we extend the model so as to incorporate a mechanism whereby the existing volume of opportunistic behavior—which is proxied by the level of tax evasion—has negative effects on the formation of new social capital, thus helping to explain how regional differences in the endowment of social capital and in the incidence of tax evasion co-evolve and why they tend to be highly persistent. The model seeks also to capture the fact that in a democracy the political determination necessary to effectively repress tax evasion depends on the voters’ propensity toward the phenomenon. Hence, one should expect that–in areas where a relatively large (small) number of citizens are tax cheaters—the consensus in favor of tough policies against tax evasion tends to be weak (strong) and short (long) lasting. Consistently with this intuition, the model shows that regions where social capital is relatively low and tax evasion is relatively high can do better in the long run (i.e., they can reach a steady state characterized by a higher level of social capital and a lower level of tax evasion) when tax-enforcement policies are determined at the national level rather than at the regional level. The opposite holds for regions where social capital is relatively high and tax evasion is relatively low.     

我国个人逃税现象的调查:一种新的方法

通过电话调查并结合邮寄问卷的调查方式,本文比较了“随机化回答”和“直接回答”两种不同的调查技术的优劣,然后通过使用“随机化回答”技术估计出几种主要类型的逃税现象在我国现阶段发生的比例。发现逃税类型与几种社会或经济影响因素之间存在着密切的关系———在大多数情况下,同样的逃税类型在不同的社会或经济影响因素下所对应的被调查者逃税比例间的差距大到足以表现出统计显著性的地步,从而揭示出现阶段逃税现象在我国的严重程度。