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Tax evasion, information reporting, and the regressive bias prediction

Pinje, Jori Veng and Boserup, Simon Halphen (2011): Tax evasion, information reporting, and the regressive bias prediction.

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A robust, but untested, prediction from the tax evasion literature is that optimal auditing induces a regressive bias in eective average tax rates compared to statutory rates, reducing the degree of redistribution in the tax system. Using Danish administrative data, we show that a calibrated structural model of rational tax evasion and tax enforcement can convincingly replicate the moments and correlations of tax evasion and probabilities of audit once we account for the presence of information reporting in the tax compliance game. We nd that both reduced-form evidence and simulations are in accordance with the prediction of regressive bias when conditioning on information reporting. However, information reporting counteracts the regressive bias generated by optimal evasion and auditing behavior and, as a consequence, the bias vanishes when considering the degree of redistribution in the overall economy.

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