Tax evasion, information reporting, and the regressive bias hypothesis

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

Abstract

A robust prediction from the tax evasion literature is that optimal auditing induces a regressive bias in e¤ective tax rates compared to statutory rates. If correct, this will have important distributional consequences. Nevertheless, the regressive bias hypothesis has never been tested empirically. Using a unique data set, we provide evidence in favor of the regressive bias prediction but only when controlling for the tax agency�s use of third-party information in predicting true incomes. In aggregate data, the regressive bias vanishes because of the systematic use of third-party information. These results are obtained both in simple reduced-form regressions and in a data-calibrated state-of-the-art model.

• Item Type: MPRA Paper
• Language: English
• Keywords: tax evasion; tax enforcement; information reporting; auditing
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; K - Law and Economics > K4 - Legal Procedure, the Legal System, and Illegal Behavior > K42 - Illegal Behavior and the Enforcement of Law; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance

References

Alm, J., McClelland, G., and Schulze, W., Why Do People Pay Taxes? Journal of Public Economics, Vol. 48 (1992), pp. 21-38.

Andreoni, J., Erard, B., and Feinstein, J., Tax Compliance. Journal of Economic Literature, Vol. 36 (1998), pp. 818-60.

Chetty, R., Friedman, J., Olsen, T., and Pistaferri, L., Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records. Quarterly Journal of Economics, (2011).

Cremer, H., Marchand, M., and Pestieau, P., Evading, Auditing and Taxing: The Equity-Compliance Tradeoff. Journal of Public Economics, Vol. 43 (1990), pp. 67-92.

Erard, B. and Feinstein, J.S., Honesty and Evasion in the Tax Compliance Game. RAND Journal of Economics, Vol. 25 (1994), pp. 1-19.

Feld, L. and Frey, B., Trust Breeds Trust: How Taxpayers Are Treated. Economics of Governance, Vol. 3 (2002), pp. 87-99.

Kleven, H.J., Knudsen, M.B., Kreiner, C.T., Pedersen, S., and Saez, E., Unwilling or Unable to Cheat? Evidence from a Randomized Tax Audit Experiment in Denmark. Econometrica, (forthcoming).

Melumad, N.D. and Mookherjee, D., Delegation as Commitment: The Case of Income Tax Audits. RAND Journal of Economics, Vol. 20 (1989), pp. 139-63.

Mookherjee, D. and Png, I., Optimal Auditing, Insurance, and Redistribution. Quarterly Journal of Economics, Vol. 104 (1989), pp. 399-415.

Nielsen, S.B. and Sørensen, P.B., On the Optimality of the Nordic System of Dual Income Taxation. Journal of Public Economics, Vol. 63(1997), pp. 311-329.

Pencavel, J.H., A Note on Income Tax Evasion, Labor Supply, and Non-linear Tax Schedules. Journal of Public Economics, Vol. 12 (1979), pp. 115-124.

Phillips, M., Taxpayer Response to Targeted Audits. (2010).

Pomeranz, D., No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax. (2010).

Reinganum, J.F. and Wilde, L.L., Equilibrium Verication and Reporting Policies in a Model of Tax Compliance. International Economic Review, Vol. 27 (1986), pp. 739-60.

Rogerson, R. and Wallenius, J., Micro and Macro Elasticities in a Life Cycle Model with Taxes. Journal of Economic Theory, Vol. 144 (2009), pp. 2277-2292.

Sanchez, I. and Sobel, J., Hierarchical Design and Enforcement of Income Tax Policies. Journal of Public Economics, Vol. 50 (1993), pp. 345-69.

Scotchmer, S., Audit Classes and Tax Enforcement Policy. American Economic Review, Vol. 77 (1987), pp. 229-33.

Scotchmer, S., The Regressive Bias in Tax Enforcement. Public Finance, Vol. 47 (1992), pp. 367-371.

Shampine, L.F., Vectorized Solution of ODEs in Matlab with Control of Residual and Error. (2009), http://faculty.smu.edu/shampine/.

Slemrod, J., Cheating Ourselves: The Economics of Tax Evasion. Journal of Economic Perspectives, Vol. 21 (2007), pp. 25-48.

Yitzhaki, S., A Note on Income Tax Evasion: A Theoretical Analysis. Journal of Public Economics, Vol. 3 (1974), pp. 201-202.