Reduce Tax Evasion Research Articles

Over the Borderline: How the Characteristics of Lines Shape Optimal Tax Policy

Lines in the tax system are demarcations of goods into different tax rate categories; tax rates may change discontinuously at a line. Geographic borders are a specific example of a line in the tax system. Using the example of geographic borders, I demonstrate how the permeability of the line (how susceptible it is to tax-driven product innovation) and how the ability of the tax authority to reduce tax evasion across lines are determinants of optimal tax policy.

Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States

We study how cultural norms and enforcement policies influence illicit corporate activities. Using confidential Internal Revenue Service (IRS) audit data, we show that corporations with owners from countries with higher corruption norms evade more tax in the U.S. This effect is strong for small corporations and decreases as the size of the corporation increases. In the mid-2000s, the United States implemented several enforcement measures to increase tax compliance. We find that these enforcement efforts were less effective in reducing tax evasion by corporations whose owners are from corrupt countries. This suggests that cultural norms can be a challenge to legal enforcement.

Financial development and the underground economy

We provide a theoretical and empirical study of the relation between financial development and the size of the underground economy. In our theoretical framework agents allocate investment between a low-return technology which can be operated with internal funds, and a high-return technology which requires external finance. Firms can reduce the cost of funding by disclosing part or all of their assets and pledging them as collateral. The disclosure decision, however, also involves higher tax payments and reduces tax evasion. We show that financial development (a reduction in the cost of external finance) can reduce tax evasion and the size of the underground economy. We test the main implications of the model using Italian microeconomic data that allow us to construct a micro-based index of the underground economy. In line with the model's predictions, we find that local financial development is associated with a smaller size of the underground economy, controlling for the potential endogeneity of financial development and other determinants of the underground economy.

Tax Evasion and Tacit Collusion

This article analyzes the interaction between tax evasion and tacit collusion. We show that the possibility of evading taxes generally influences the incentives to form a cartel. We establish that whether tax evasion increases or decreases the set of circumstances allowing stable collusion depends on (1) the relation between the benefits of tax evasion and legal after-tax profits and (2) effective enforcement of antitrust laws. In considering variations in tax enforcement and antitrust enforcement, we find that stricter tax enforcement may actually increase the level of tax evasion, as it may promote the cartelization of industries. In contrast, stricter antitrust enforcement lowers incentives for cartelization, thereby possibly reducing tax evasion at the same time.

Price and Tax Measures and Illicit Trade in the Framework Convention on Tobacco Control: What We Know and What Research Is Required

Article 6 of the Framework Convention on Tobacco Control commits Parties to use tax and price policies to reduce tobacco use, whereas Article 15 commits Parties to implement measures to eliminate the illicit trade in tobacco products. This paper identifies research gaps/needs, especially in low- and middle-income countries, which, if adequately addressed, would help in implementing Articles 6 and 15. Based on a recent comprehensive review on the impact of tax and price on tobacco consumption and a summary of reviews and narratives about the illicit tobacco market, research gaps are identified. Countries have highly diverse research needs, depending on the stage of the tobacco epidemic, previous research and data availability, and making a ranking of research needs infeasible. Broad issues for further research are the following: (1) monitoring tobacco consumption, prices, and taxes, (2) assessing the effectiveness of the tax structure in generating revenue and reducing tobacco use, (3) strengthening the tax administration system in order to reduce tax evasion and tax avoidance, (4) improving our understanding of the political economy of tobacco tax policy, and (5) employing a multidisciplinary approach to assessing the magnitude of illicit tobacco trade. At a technical level, the case for increasing excise taxes to improve public health and increase government revenue is easily made, but the political and policy environment is often not supportive. In order to effectively impact policy, the required approach would typically make use of rigorous economic techniques, and be cognizant of the political economy of raising excise taxes.

Fiscal consequences of scrapping cash

The emergence of a range of digital media of exchange such as debit cards, credit cards, pre-loaded transport tickets, cafeteria passes and telephone coupons means for the first time that money in the form of paper currency and coins is no longer essential. The scrapping of traditional cash would mean the removal of the means of anonymous exchange with implications for the fiscal deficit. On the one hand, it would mean a loss of seigniorage for national governments, with the size of this loss depending on how the cash is removed from circulation. On the other hand, it would reduce tax evasion, which would increase fiscal revenue of national, state and municipal governments. The absence of an anonymous means of exchange also has favourable fiscal implications from reduced spending on law enforcement, legal proceedings, incarceration, and public health from impeding the drug trade: digital media of exchange provide a trail to follow for illicit transactions, hindering activities of buyers and sellers. This paper calculates the size of the fiscal implications of scrapping cash and finds substantial gains for all levels of a nation’s government, even the national government that loses seigniorage. It takes the view of Canada where virtually every adult has an account at a financial institution.

Importing Corruption Culture from Overseas: Evidence from Corporate Tax Evasion in the United States

This paper studies how cultural norms and enforcement policies influence illicit corporate activities. Using confidential IRS audit data, we show that corporations with owners from countries with higher corruption norms engage in higher amounts of tax evasion in the U.S. This effect is strong for small corporations and decreases as the size of the corporation increases. In the mid-2000s, the United States implemented several enforcement measures which significantly increased tax compliance. However, we find that these enforcement efforts were less effective in reducing tax evasion by corporations whose owners are from countries with higher corruption norms. This suggests that cultural norms can be a challenge to legal enforcement.

Referendums, trust, and tax evasion

Countries engaged in transitions from Communist rule to democracy and market economies face a considerable challenge to foster tax morale and to reduce tax evasion. Tax evasion, however, severely limits the capacities of these reformed states, which reduces in a vicious circle the citizens' incentives to pay taxes. The question then arises how this vicious circle may be broken. Several authors suggest that political institutions may do the trick. Based on insights that institutions allowing a direct say on policy issues (especially tax questions) may increase tax morale, we propose to study comparatively how the link between trust and tax morale is affected by these institutions. We find that allowing for referendums strengthens the link between trust and tax morale, but that this effect depends on the nature of the institutions.

Getting the word out: Enforcement information dissemination and compliance behavior

The question for the tax authority is how individuals become aware of enforcement effort. To be an effective tool in reducing tax evasion taxpayers must be aware of the current audit and penalty regime. We use laboratory experiments to examine the compliance impact of types of information dissemination regarding audit frequency and results. The information includes “official” information disseminated by the tax authority, and “unofficial”, or informal, communications among taxpayers. Our results indicate that the effect of the type of post-audit information is conditional on whether the taxpayer is well informed of the audit rate prior to filing. We find that the tax authority would be served by pre-announcing audit rates credibly and by emphasizing the previous period audit frequency in annual reporting of enforcement effort.

The relationship between culture and tax evasion across countries: Additional evidence and extensions

This study builds on the work of Tsakumis et al. [Tsakumis, G. T., Curatola, A. P,. & Porcano, T. M. (2007). The relation between national cultural dimensions and tax evasion. Journal of International Accounting, Auditing and Taxation, 16, 131–147] by conducting further empirical analysis of the relationship between Hofstede's [Hofstede, G. H. (1980). Cultures consequences: International differences in work-related values. Beverly Hills, CA: Sage Publications] cultural dimensions and tax evasion across countries using multiple measures of tax evasion to gain additional evidence on the subject. Moreover, this study extends the preliminary international tax evasion model developed by Tsakumis et al. [Tsakumis, G. T., Curatola, A. P,. & Porcano, T. M. (2007). The relation between national cultural dimensions and tax evasion. Journal of International Accounting, Auditing and Taxation, 16, 131–147] to examine, along with culture, the impact of legal, political, and religious variables on tax evasion across countries. Based on data from 47 countries, and after controlling for economic development, the regression results indicate that the higher the level of uncertainty avoidance and the lower the level of individualism, legal enforcement, trust in government, and religiosity, the higher is the level of tax evasion across countries. These findings remain robust to multiple measures of tax evasion. Government policymakers should find the results of this study useful in assessing the likelihood of tax evasion from cultural, legal, political, and religious perspectives, and in developing tax reform policies to reduce tax evasion.

Loan Contracts Under Borrowers' Tax Evasion: The Case of Russia

This paper sheds some light on how disclosure of information by small firms affects terms of their loan contracts with banks and how such contracts may encourage tax compliance and therefore reduce the shadow economy. In an environment with non-verifiable returns of tax evading borrowers his paper suggests a loan contract that allows for decreased collateral requirements and at the same time may induce borrowers' tax compliance. The enforcement mechanism is comprised of pledging costly hidden resources using escrow and a probability that the bank reports this information to the tax authorities. A combination of these two instruments and the interest rate allows for less stringent requirements on the borrowers' initial resources than usual collateral. The paper demonstrates also that even though banks in less developed economies might grant loans to tax evading firms that use double accounting, this does not necessarily encourage growth of the shadow economy. Tax compliance may be attained through the terms of loan contracts despite that regulator attempts to reduce tax evasion directly by making it more costly and unattractive may not bring the desired effect.

The Relationship between Culture and Tax Evasion: A Cross-Country Study

This study investigates the relationship between culture and tax evasion across countries. Specifically, the study unpackages culture in terms of Hofstede's (1980) power distance, individualism, uncertainty avoidance and masculinity cultural dimensions, and develops hypotheses which consider their relationship with tax evasion. Based on data from 47 countries, and after controlling for economic development, legal framework and political structure, the OLS regression results show that the higher the level of power distance and uncertainty avoidance and the lower the level of economic development and common law, the higher is the level of tax evasion across countries. These findings remain robust to different measures of tax evasion. Government policy-makers should find the results of this study useful in assessing the possibility of tax evasion from cultural, economic and legal perspectives and in developing tax reform policies to reduce tax evasion.

Audit Certainty, Audit Productivity, and Taxpayer Compliance

Strategies for reducing tax evasion include stricter enforcement, but taxpayer responses to increased enforcement are difficult to measure with field data. We use experimental methods to examine in...

The Uneasy Case for a Comprehensive Tax Base

In discussing tax simplification, commentators often advocate a comprehensive income tax system that has a broad base and low rates over income tax systems that have a narrow base and higher marginal rates (such as the one in the US). Advocates assert that a comprehensive tax base with low marginal rates will reduce tax evasion and tax avoidance and increase economic efficiencies. This paper shows that two of the benefits often attributed to a comprehensive tax base, decreased tax evasion and increased economic efficiency, are not as certain as may first appear. With respect to tax evasion, economic theory cannot predict whether reduced tax rates will result in less tax evasion. Depending upon assumptions about how risk aversion changes in response to income, some models predict that tax evasion will actually increase as tax rates decrease. Since there is significant uncertainty about how risk aversion actually functions in the real world, there is no basis for preferring any particular set of assumptions regarding risk aversion. Thus, the effect of tax rates on evasion has to be viewed as an empirical question. The empirical studies, however, have produced contradictory results. As to the other claimed benefit, increased efficiency, economic theory also cannot predict whether broadening the tax base and reducing the marginal rates will increase economic efficiency as compared to a narrower tax base with higher rates. Increasing the tax base will cause items that had previously not been taxed to be taxed and, therefore, increase the excess burden with respect to those items. At the same time, the lower tax rate will decrease the excess burden of items that had already been taxed in the narrow base. Whether the increases will exceed the decreases cannot be predicted by theory. Instead, the question is again an empirical one that is very difficult to resolve. With respect to the benefits of a comprehensive income tax that are discussed herein, the only certain one is that it should reduce the opportunity for tax avoidance since it reduces differential treatment of items.

Appropriate Measures to Use Money Laundering Prevention as an Antidote to Tax Evasion

Money laundering, which is closely linked with tax evasion and informal trade, is facilitated by the poorly regulated financial institutions of "mafia nations". These nations make billions of dollars by laundering money and giving safe haven to drug dealers and corrupt politicians, allowing them to transfer money globally. Money laundering prevention policies require financial institutions to periodically update their customer's personal information. Furthermore, they attemp to match tax and transaction reports collected from banks and non-banks around the world to detect tax evasion. This research explains how efficient policies for preventing money laundering can help reduce tax evasion.

The Effects of Bilateral Tax Treaties on U.S. FDI Activity

The effects of bilateral tax treaties on FDI activity have been unexplored, despite significant ongoing activities by countries to negotiate and ratify these treaties. This paper estimates the impact of bilateral tax treaties using both U.S. inbound and outbound FDI over the period 1966-1992. Robust to a wide variety of alternative specifications, we find no evidence that bilateral tax treaties increase FDI activity, contrary to OECD-stated goals for such treaties. In fact, our estimates suggest that for our sample there may instead be economically and statistically significant negative effects of new bilateral tax treaties on U.S. outbound activity to the tax treaty partner country. These findings are consistent with claims that tax treaties are not intended to improve capital flows, but rather to reduce tax evasion through transfer pricing practices or otherwise.

When Tax Collectors Become Collectors for Child Support and Student Loans: Jeopardizing the Revenue Base?

SUMMARYThis paper investigates the relationship between making additional payments to the state for student loan (via the Higher Education Contribution Scheme) and child support (via the Child Support Scheme) and compliance with tax law. Data are taken from the Community Hopes, Fears, and Actions Survey based on a random sample of 2040 individuals. Additional payments were found to pose a compliance problem for tax authorities. At the same time, this study demonstrated that perceived deterrence, moral obligation and possible trustworthiness play significant roles in reducing tax evasion. An important finding to emerge from this study is that tax evasion is more likely to accompany additional payments when personal income and belief in trust norms are low. The finding of greater tax evasion among economically marginalized groups has been demonstrated in other contexts, but the adverse effects of becoming irreconcilably socially marginalized from legal authority has tended to be both undervalued and under‐theorized in the taxation compliance literature.

Tax evasion in a model of endogenous growth

This paper integrates tax evasion into a standard AK growth model with public capital. In the model, the government optimizes the tax rate, while individuals optimize tax evasion. It studies tax rate, tax evasion and economic growth, and compares them with otherwise identical economies except those without tax evasion. It inquires into the effects of three government policies on tax rate, tax evasion, and economic growth. It finds that an increase in both unit cost of tax evasion and punishment–fines reduces tax evasion, whereas an increase in tax auditing reduces tax evasion only if the cost of tax enforcement is not too high. The three policies theoretically have ambiguous effects upon economic growth, due to their indirect effects upon tax evasion and optimal tax rate. The model is calibrated to quantitatively assess the effects of the three above-mentioned policies. It finds that the three policies are quantitatively effective in discouraging tax evasion, but with small growth effects, unless the degree of government externality is very high.

Tax Evasion and Tax Progressivity

In a pure tax evasion framework in which the monetary penalty is a function of the evaded tax, more progressive income taxes will reduce tax evasion if income has to be declared. However, if tax payments have to be declared, higher tax progressivity will have no effects. Thus, the relationship between tax evasion and tax progressivity depends on whether income or taxes have to be divulged to tax authorities. If the fine is a function of undeclared income, higher tax progressivity will always raise evasion.

Do Bilateral Tax Treaties Promote Foreign Direct Investment?

We explore the impact of bilateral tax treaties on foreign direct investment using data from OECD countries over the period 1982-1992. We find that recent treaty formation does not promote new investment, contrary to the common expectation. For certain specifications we find that treaty formation may actually reduce investment as predicted by arguments suggesting treaties are intended to reduce tax evasion rather than promote foreign investment.