Policies Against Tax Evasion Through Ocupational Choice

Abstract

This paper presents a model of tax evasion with endogenous labor supply in which underreporting in one sector is possible but impossible in another. In addition, there is an unregistered sector where no one reports their earnings to the tax office. We found that the effects on the number of evaders and tax ghosts become more robust and conclusive than those on hours of unreported work usually considered by the literature. Moreover, our results are supported by abundant econometric studies, thereby eliminating current discrepancies between the theoretical framework in the tradition of Allingham and Sandmo (1972) and empirical evidence. Surprisingly, most of the measures that are effective against tax evasion in the registered sectors expand the unregistered sector. To solve this we propose both coercive measures to be applied mainly in the unregistered sector and policies aimed at improving moral attitudes against evasion and productivity rates in the aboveground economy.