Undeclared Income Research Articles

Income Tax Buyouts and Income Tax Evasion

A tax buyout is a contract between tax authorities and a tax payer which reduces the marginal income tax rate in exchange for a lump-sum payment. While previous contributions have focussed on labour supply, we consider the interaction with tax evasion and show that a buyout can increase expected tax revenues. This will be the case if (1) the audit probability is constant and the penalty for evasion is a function of undeclared income or (2) the penalty depends on the amount of taxes evaded, and authorities use information about income generated by the decision about a tax buyout offer when setting audit probabilities. Since individuals will only utilise a tax buyout if they are better off, higher tax revenues imply that such contracts can be Pareto-improving.

Should One Hire a Corrupt CEO in a Corrupt Country?

This paper examines the interaction between propensity to corrupt (PTC) and firm performance. First, I use unique data from Moscow traffic violations to build an individual measure of PTC for every Muscovite with a driver’s license (3.1 million people). Next, I determine the PTC for the management of 58,157 privately held firms. I find that a one standard deviation increase in company management PTC corresponds to a 3.4% increase in income diversion. I also find that corrupt managers pay a higher portion of salaries under the table. A one standard deviation increase in PTC is associated with a 7% increase in undeclared employee income at a firm. Finally, I document that firms with corrupt management significantly outperform firms with not corrupt management. A one standard deviation increase in firm management PTC is associated with a 2.2% increase in the annual revenue growth rate and a 3.9% increase in revenue per employee. However, this effect is not present in foreign-owned firms.

Complex research on undeclared work : theoretical aspects and empirical application in Lithuania

Relevance of undeclared work as a scientific issuebecomes evident through the fact that this phenomenon isinsufficiently investigated (no single concept is agreedupon), besides, it is difficult to estimate its extent inquantitative terms. The extent of undeclared work is notreflected in official statistics, thus measurement of changein the officially registered level of unemployment mightproduce the image of unemployment as an economic andsocial issue, which fails to represent reality.The article addresses the issue pertaining toambiguous treatment of the concept “undeclared work” inscientific and special researches, analyses cases when theconcept is treated as identical to other employment andunemployment ideas, and explores quantitative assessmentaspects of undeclared work.Scientific literature and applied research uses differentterminology while describing undeclared work (namely,undeclared work, illegal work and hidden unemployment)and provides various definitions. The chosen concept ofundeclared work (as a structural part of shadow economy)depends on objectives of a research as well as the conceptof shadow economy.In this article, the concept of the “shadow economy”contains economic activities undertaken in spite oflegislative requirements and restrictions even though suchactivities are subject to rigorous regulation and control(Krumplyte 2008, 2009a, 2009b, 2009c, 2010). In thisresearch, undeclared work is considered in the context oftax non-compliance, disassociating from economic activitiesattributable to unregulated economy (self-employed naturalpersons, legally not required to register their activity andpay taxes) as well as criminal activities. This article definesthe undeclared work as an economic activity (comprisinglabour relations in enterprises as well as self-employed),which is carried out in violation of legislative requirementswith the purpose of tax non-compliance.Phenomena of undeclared work may be classified intotax avoidance and tax evasion categories. Tax avoidance isperceived as reduction or nonpayment of payable taxes inthe form of reduction or elimination of tax base of acertain tax with the help of artificially created businessschemes or sequences of transactions Tax evasion isattributed to the group of the most serious offences, i.e. taxnon-compliance in the form of concealed economic activity(Krumplyte, 2009b, 2009c). Under the given context, aclassification of undeclared work phenomena in Lithuaniawas designed in the course of the empiric research.Evaluating the trends of undeclared work in a complexmanner, the authors suggest identifying indicatorspertaining to distribution of each phenomenon and theextent of formally undocumented income. The distributionindicator of a phenomenon indicates a portion of economicoperators who were involved in a certain economic activityand participated in shadow economy. The indicatorshowing the extent of officially undocumented incomeindicates the portion of income within a certain type oftotal income per one economic operator, not included intoofficial accounting documents.The article offers the results of the empiric research(delivered following the peer review method) ondistribution of undeclared work phenomena in Lithuaniaand trends (of the periods 2006-2008 and 2009-2011)pertaining to the extent of undeclared income (employmentincome and earnings received from self-employment).

Cour de Cassation française, 2e chambre civile, 24 janvier 2002 - Compensation for Lost Undeclared Income

Abstract: In this case of 24 January 2002 (No. 99-16.576, Bull. civ. II, No. 5, RTD civ. 2002.309, obs. P. Jourdain), the Second Civil Chamber of the French Supreme Court ruled on the question of the victim?s situation in an unlawful context. In the case in question, a cleaner who was a victim of a traffic accident submitted a claim for compensation to the insurers of the liable driver for damage resulting not only from the loss of the salary as evidenced by the pay-slips, but also from the loss of undeclared income related to black market work. The Court of Appeal of Montpellier approved the claim for full compensation. But the French Supreme Court overturned the decision, based on the fact ?that a victim can be awarded compensation for the loss of her income only if the latter is lawful?. On the basis of Article 1382 of the French Civil Code, this refusal of compensation makes a fundamental condition for the right to compensation of the lawfulness of the victim?s situation. This case will be discussed from the point of view of Luxembourgian, Spanish, Belgium and Greek law.

Socially Optimal Royalty Design and Illegal Logging Under Alternative Penalty Schemes

We study the socially optimal design of forest royalty and enforcement instruments in the case where concessions are allocated by a government, illegal logging incentives are present, and the government has available both area-based and value-based royalty instruments. When harvesters are risk neutral, the optimal policy mix depends on the presence of negative externalities and on the type of penalty scheme. For risk-averse harvesters the results differ. When the penalty is assessed on undeclared income, a royalty based subsidy is not optimal, but when penalties are levied on evaded royalty payments, the optimal royalty system may be progressive or regressive depending on the importance of the government's revenue constraint. Auditing is optimal regardless of the penalty scheme or presence of externalities, although its level differs. Accounting for negative externalities in the social welfare function implies a higher optimal royalty rate, but lower progression in the rate, and increased auditing.

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.

Reflections on a Geographic Dichotomy: Archipelago Russia

A noted economic geographer and Sovietologist conceptualizes Russia's current economy as an archipelago, consisting of widely scattered nodes of viable, integrated activity separated by an enormous expanse of "dead space." The dichotomy between metropolitan Russia and its hinterland is developed through an examination of contrasts in such major indicators of well-being as natural gas consumption, access to education, the middle class, retail trade and services, undeclared income, and port-hinterland multiplier effects. Also discussed are the major types of hinterland (classical, or resource frontier, versus backwater), the special case of the Russian Far East and Transbaykalia, and contrasts with developments on the North American continent. Journal of Economic Literature, Classification Numbers: O10, O18, O50. 38 references.

Tax Evasion in a Unionized Economy

In a unionized labor market, a substitution of a payroll for an income tax will not alter employment if tax obligations are fulfilled. However, if workers or firms can evade taxes, this irrelevance result might no longer apply. This will especially be the case if the fine for tax evasion depends on undeclared income or on wage payments or if withholding regulations prevent optimal evasion choices. In such instances, tax evasion opportunities make the legal incidence of taxes an important determinant of their economic incidence and employment can rise with a substitution of an income for a payroll tax.

Tax Evasion, Risky Laundering, and Optimal Deterrence Policy

This paper extends the Allingham and Sandmo's (1972) model of income tax evasion to take account of laundering opportunities, allowing the taxpayer to determine not only the amount of actual income to declare but also the amount of undeclared income to launder. Laundering, aside of entailing direct costs, is assumed to be an unlawful activity, subject to the risk of detection and punishment. The tax authorities devote separate resource efforts to initial audits which may detect undeclared income that has not been laundered and to in-depth investigation which may detect undeclared income that has been laundered. The paper analyzes the effects of laundering incentives on evasion and derives guidelines for the optimal design of a joint evasion/laundering deterrence policy.

On the Excess Burden of Tax Evasion

A simple model of tax evasion is presented leading to the following conclusions: (1) Tax evasion is a function of, inter alia, the marginal tax rate only if the probability of being caught is a function of undeclared income; (2) Tax evasion introduces uncertainty, which causes a utility loss. An example is presented showing that the excess burdens of tax evasion and the income tax are sometimes additive. Thus ignoring the excess burden of tax evasion will usually lead to underestimation of the total excess burden of a tax.

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.

Tax Evasion and Labor Supply

Recently, a number of economists have applied the modern theory of choice under risk to the study of criminal activities. The important work of Becker (1968) has led to a number of contributions; see for example Brown & Reynolds (1973), Ehrlich (1973), Sjoquist (1973) and Block & Heineke (1975). Some studies have focused on income tax evasion as a criminal activity, e.g. Allingham & Sandmo (1972), Kolm (1973), Singh (1973) and Srinivason (1973). A number of works have also stressed the importance of uncertainty for labor supply decisions; see for example Block & Heineke (1973) and Hartley & Revankar (1974). The purpose of this note is to integrate the theories of income tax evasion with the conventional theories of labor supply. The model we use for this purpose is considered in Section II. In Section III the effects of different parameter changes on labor supply and on undeclared income are calculated and interpreted. The results are summarized in Section IV.