Joint tax evasion

Tax evasion analysis typically assumes that evasion involves individual taxpayers responding to some given policies. However, evading taxes could require the collaboration of at least two taxpayers. Detection depends on the costly avoidance activities of both transacting partners. An increase in sanctions leads to a direct increase in the expected cost of a transaction in the illegal sector, but it may also increase the incentive for the partners to cooperate in avoiding detection. The total cost of transacting in the illegal sector can fall, and tax evasion may increase. The policy implications of this phenomenon are considered. JEL Classification: H26
L'évasion fiscale collective. Dans les analyses de l'évasion fiscale, on suppose habituellement que le payeur de taxe fait face à un ensemble donné de politiques auxquelles il réagit. Pourtant, dans le cas des transactions marchandes, l'évasion fiscale n'est possible que si plusieurs agents coopèrent ensemble. La probabilité que l'évasion soit détectée dépend alors des efforts que chacun fait pour la cacher. Dans un tel contexte, de plus lourdes sanctions accroissent le coût espéré des transactions illégales, mais peuvent aussi, indirectement, accroître l'incitation pour les partenaires à coopérer pour cacher leur activité illégale. Il en résulte que le coût total des transactions illégales peut diminuer et l'évasion fiscale augmenter. Nous étudions les implications de ce phénomène.     

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.     

A tax discrepancy coefficient resulting from tax evasion or tax expenditures

Tax evasion and tax expenditures introduce discrepancies between taxpayers. In this paper, a tax discrepancy coefficient has been worked out in order to establish, given a constant tax yield, what bigger or smaller amounts taxpayers would have to pay if tax evasion or tax expenditures were completely eliminated. After the definition of the coefficients these are calculated for individual income tax returns in Belgium. Similar coefficients can be established for other types of taxation, such as inheritance tax, corporate income tax or even sales tax (e.g. V.A.T.).     

Household tax evasion

Household members share public goods and make intra-household transfers. We show how these features of the household interact with the tax evasion decision, and identify the dimensions in which household evasion differs from individual evasion. In the model we present two members of a household choose how much to contribute to a household public good and how much self-employment income to evade. We are interested in how different evasion possibilities interact with the contribution decisions to the household public good and the role of income transfers within the household. We show the household evasion decision differs from the individual decision because it affects the outcome of the household contribution game. When household members are taxed as individuals neutrality applies when choices are not constrained. If the evasion level of one household member is constrained then an income transfer can generate a Pareto improvement. When the household members are jointly taxed there is a couple constraint on strategies and corner solutions can emerge.     

A simulation study of income tax evasion

In a game-simulation context, tax evasion behavior of 15 subjects was observed. Large fines were found to be more effective deterrents than frequent audits. The decision to underreport income appears to be influenced by different factors than the magnitude of underreporting. Tax evasion behavior differed widely among individuals.     

Local interaction in tax evasion

When individuals underreport their incomes, they take into account their private gains and moral losses, the latter depending on the acquaintances’ previous underreports. We prove that under quite natural assumptions the process globally converges to the symmetric steady state.     

Merchant internalization and tax evasion

Merchant internalization has been used to explain why merchants may accept high fees to accept card payments. However, merchants seem to be more resistant in some economic activities or countries; in particular, when the shadow economy is sizeable. Cash payments are usually associated with tax evasion, and therefore the analysis of card industry should take it in to consideration. This paper explores the role of tax evasion in the merchant internalization condition; first, considering it as exogenous, and then, as a strategic reason.     

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 with agency costs

This paper examines corporate tax evasion in the context of the contractual relationship between the shareholders of a firm and a tax manager who possesses private information regarding the extent of legally permissible reductions in taxable income, and who may also undertake illegal tax evasion. Using a costly state falsification framework, we characterize formally the optimal incentive compensation contract for the tax manager and, in particular, how the form of that contract changes in response to alternative enforcement policies imposed by the taxing authority. The optimal contract may adjust to offset, at least partially, the effect of sanctions against illegal evasion, and we find a new and policy-relevant non-equivalence result: penalties imposed on the tax manager are more effective in reducing evasion than are those imposed on shareholders.     

Tax morale and tax evasion reports

The study proposes a new measure of tax morale for Italy based on voluntary tax evasion reports. Using this measure, I detected a positive relationship between tax morale and social capital, political participation, and immigration, but a negative relationship between tax morale and the dissatisfaction with public services and unemployment.     

International tax arbitrage, tax evasion and interest parity conditions

Using a finite-horizon general equilibrium model with uncertainty and money, we characterize situations where tax arbitrage opportunities may arise for international portfolio investors in an economy with heterogeneous capital income taxation when there is some scope to evade taxes on foreign capital income. We derive tax-modified uncovered interest parity conditions and forward rates similar to the no-tax ones, but augmented by tax-induced “risk-premium” terms; covered interest parity conditions remain unaffected by the introduction of capital income taxes, a consequence of our approach of bounding tax-based arbitrage without restricting arbitrage per se.     

A note on income tax evasion,labor supply,and nonlinear tax schedules

The existing literature on income tax evasion lays claim to two important implications: one is that higher tax rates induce greater income declarations and the other is that increases in gross income induce a fall in the fraction of income declared. The purpose of this paper is to examine the robustness of these results with respect to three modifications of the standard model. The first involves relaxing the assumption of linear income tax schedules. The second modification is to consider an alternative form for the penalty function. Thirdly, we consider the consequences of the tax payer making a joint hours of work-income declaration decision.     

International capital tax evasion and the foreign tax credit puzzle

In this paper we examine how the presence of international tax evasion affects the choice of a foreign tax credit by a capital exporting region. Since the credit raises the opportunity cost of concealing foreign source income, it can be employed to discourage evasion activity. International tax evasion can thus help to rationalize the adoption of a tax credit in excess of a deduction-equivalent rate. JEL Classification: H21, H26
Evasion fiscale pour le capital international et le problème du crédit d'impôt pour le fardeau fiscal à l'étranger. Ce mémoire examine comment la présence d'évasion fiscale pour le capital international affecte le choix du crédit d'impôt pour le fardeau fiscal à l'étranger par une région qui exporte du capital. Puisque le crédit d'impôt accroît le coût d'opportunité du camouflage de la source étrangère de revenus, c'est une technique qui peut être employée pour décourager l'évasion fiscale. Voilà qui peut expliquer qu'on adopte un crédit d'impôt qui est plus généreux que ce qui constituerait la déduction dans un système où le fardeau fiscal à l'étranger est simplement déduit du revenu imposable.     

Tax evasion and tax morale: A social network analysis

We study the effects of tax morale and social norms on tax evasion when individuals interact in a network. We present a model that incorporates incentives for tax compliance in the form of punishment and fines, tax morale, and reputation for social behaviour. We assume that individuals adjust their tax morale by observing the neighbours' tax morale. We simulate the model for different values of the parameters and show that the steady-state share of taxpayers as opposed to tax-evaders is affected by the probability of finding like-minded peers in the reference group (network integration), the weight that individuals attribute to reputation, and the share of individuals who update their tax morale. Last, we consider the possibility of a fiscal authority using the knowledge of the network structure and targeting ‘central’ individuals. We show that by positively affecting the tax morale of individuals whose influence within the network is high, a fiscal authority can increase tax compliance.     

A note on progression,penalty schemes and tax evasion

This note deals with the question of whether shifting the tax base towards more progression will stimulate or discourage tax evasion, when the tax base is shifted so that either the expected tax revenues of government or the expected utility of taxpayer will remain unchanged. The answer turns out to depend sensitively on the nature of penalty schemes if caught in tax evasion. If the penalty rate is charged on the undeclared income, tax evasion will increase, while if the penalty rate is charged on the evaded tax, tax evasion will decrease when the tax base is shifted towards progression.     

Kleptocracy and tax evasion under resource abundance

Evidence has shown that petroleum wealth is associated with less transparency and at the same time less tax collection. In this paper, we find that the two issues are linked through the citizens’ tax evasion behavior. We develop a model to explain this link and conduct extensive empirical tests of its validity. The explanation is that officials tradeoff greater transparency to improve tax compliance against less transparency to increase gains from corruption. Oil windfalls diminish tax revenue needs, causing officials to optimize on less transparency. Seeing this, citizens optimize on a lower level of tax compliance. At equilibrium, both decline with a positive oil shock. We also study the alternative channel in which tax compliance responds to enforcement. Transparency is found to be the more robust channel. Ignoring citizens’ strategic behavior would lead to predicting suboptimal investment in state capacity for tax enforcement. Using giant oil discoveries data combined with oil price data, we develop a dynamic composite instrument and estimate the model with a dynamic panel system generalized method of moments. We find robust support for our explanation and the model's deep structure for 130+ countries and the 1980–2010 period.     

Indeterminacy, underground activities and tax evasion

This paper introduces underground activities and tax evasion into a one-sector dynamic general equilibrium model with aggregate external effects. The model presents a novel mechanism driving the self-fulfilling prophecies, which is characterized by well behaved (downward sloping) labor demand schedules. This mechanism differs from the customary one, and it is complementary to it. Compared to traditional labor market income, the income derived from underground labor activity is subject to a lower expected tax rate when considering both the probability of detection and the evasion penalty. During a belief-driven expansion, the household allocates more time to both traditional and underground labor supply. In equilibrium, this action serves to lower the effective labor tax rate faced by the household, thus providing stimulus to aggregate labor supply so as to make the initial expansion self-fulfilling. The mechanism here is akin to a “regressive tax”; the household's effective tax rate depends negatively on the level of total labor income. We argue that an underground sector, and the associated tax evasion, offer a good economic rationale for a regressive tax rate.     

Economic growth,corruption and tax evasion

In this paper, we explore tax revenues in a regime of widespread corruption in a growth model. We develop a Ramsey model of economic growth with a rival but non-excludable public good which is financed by taxes which can be evaded via corrupt tax inspectors. We prove that the relationship between the tax rate and tax collection, in a dynamic framework, is not unique, but is different depending on the relevance of the “shame effect”. We show that in all three cases — “low, middle and high shame” countries, the growth rate increases as the tax rate increases up to a threshold value, after which the growth rate begins to decrease as the tax rate increases. But, for intermediate tax rates, the rate of growth for “low shame” countries is lower than that of “uniform shame” countries which is, in turn, lower than that of “high shame” countries. This happens because the growth rate is more sensitive to variations of t in an honest country rather than in a corrupt country.