nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2017‒01‒15
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Corruption and Firm Tax Evasion By James Alm; Jorge Martinez-Vazquez; Chandler McClellan
  2. W(h)ither the Tax Gap? By James Alm; Jay A. Soled
  3. When You Know Your Neighbour Pays Taxes: Information, Peer Effects, and Tax Compliance By James Alm; Kim M. Bloomquist; Michael McKee
  4. Honesty or Dishonesty of Taxpayer Communications in an Enforcement Regime By James Alm; David M. Bruner; Michael McKee
  5. The Strength of the Symbol: Are we Willing to Punish Evaders ? By Aurélie Bonein; Cécile Bazart
  7. Mathematical models describing the effects of different tax evasion behaviors By M. L. Bertotti; G. Modanese
  8. A comprehensive analysis of the wage curve in Brazil: Non-linearities, urban size, and the spatial dimension By Ana Barufi; Eduardo Haddad; Peter Nijkamp

  1. By: James Alm (Department of Economics, Tulane University); Jorge Martinez-Vazquez (Andrew Young School of Policy Studies, Georgia State University); Chandler McClellan (National Bureau of Economic Research)
    Abstract: Although corruption and tax evasion are distinct and separate problems, they can easily become intertwined and reinforcing. A society that is more corrupt may enable more tax evasion as corrupt officials seek more income via bribes; conversely, higher levels of tax evasion may drive corruption by offering more opportunities for bribes. While a large body of work on each subject separately has emerged, the relationship between the two problems has remained a largely unexplored area. This paper focuses on how the potential for bribery of tax officials affects a firm's tax evasion decisions. To test how the potential for bribery affects a firm's tax reporting decisions, we use firm-level information on reporting obtained from the World Enterprise Survey and the Business Environment and Enterprise Performance Survey. Our basic estimation approach uses instrumental variables methods to control for the potential endogeneity of evasion and corruption. We also use propensity score matching methods as a robustness check. Our results show that it is corruption that largely drives higher levels of evasion; that is, corruption of tax officials is a statistically and economically significant determinant of tax evasion. The presence of tax inspectors who request bribes results in a reduction of sales reported for taxes of between 4 and 10 percentage points. Additionally, larger bribes result in higher levels of evasion. Overall these results indicate that governments seeking to decrease tax evasion - and so increase tax revenues - must work first to ensure an honest tax administration.
    Keywords: Tax compliance, corruption.
    JEL: H26 H32 D7
    Date: 2016–12
  2. By: James Alm (Department of Economics, Tulane University); Jay A. Soled (Rutgers Business University)
    Abstract: For decades, policy makers and politicians have railed against the "tax gap", or the difference between what taxpayers are legally obligated to pay in taxes and what they actually pay in taxes. To close the gap, Congress has instituted numerous reforms, with varying degrees of success. Notwithstanding these efforts, the tax gap has largely remained intact, and, if anything, its size has gradually grown over the last several decades. However, the tax gap may well begin to diminish in size (or "wither" away), if not immediately then over time. Three developments will help narrow the tax gap's size. First, the ubiquity of credit cards, debit cards, and smartphone payment apps has purged cash - the erstwhile driving engine of the tax gap - from its use in many economic transactions. Second, the availability of third-party sources of information, combined with the universal use of computerization to store, access, and analyze information, has significantly curtailed a taxpayer's ability to hide income here in the United States or overseas. Third, broad economic trends such as concentration and globalization have generated a workforce dynamic in which taxpayers generally are employed by large business enterprises (where individual tax compliance is fairly high) rather than in traditional mom-and-pop businesses (where individual tax compliance is typically low). The implications associated with a lower tax gap are vast. Even beyond the usual considerations associated with greater tax compliance (e.g., increased revenues, reduced noncompliance-induced inefficiencies, and improved horizontal and vertical equity of tax burdens), taxpayers would experience a shift in the labor market and an adjustment in the prices paid for consumer goods and services. Also, rather than conducting audits and deterring noncompliance, the Internal Revenue Service (IRS) would be able to dedicate a greater share of its limited resources to other pressing agenda items, such as assisting taxpayers in their compliance endeavors. There are, of course, other countervailing economic trends that may subvert the forces that will act to reduce the tax gap, so its future path remains highly uncertain (and hence the alternative use of "whither"). Also, for a whole host of reasons, especially reductions in IRS funding, the tax gap will not be closed anytime soon. Nevertheless, the tide against tax noncompliance may finally be turning.
    Keywords: Tax gap, tax compliance.
    JEL: H2 H26
    Date: 2016–12
  3. By: James Alm (Department of Economics, Tulane University); Kim M. Bloomquist (Taxpayer Advocate Service, U.S. Internal Revenue Service); Michael McKee (Department of Economics, Appalachian State University)
    Abstract: In this paper, we suggest that individuals' tax compliance behaviours are affected by the behaviour of their "neighbours", or those about whom they may have information, whom they may know, or with whom they may interact on a regular basis. Individuals are more likely to file and to report their taxes when they believe that other individuals are also filing and reporting their taxes; conversely, when individuals believe that others are cheating on their taxes, they may well become cheaters themselves. We use experimental methods to test the role of such information about peer effects on compliance behaviour. In one treatment setting, we inform individuals about the frequency that their neighbours submit a tax return. In a second treatment setting, we inform them about the number of their neighbours who are audited, together with the penalties that they pay. In both cases, we examine the impact of information on filing behaviour and also on subsequent reporting behaviour. We find that providing information on whether one's neighbours are filing returns and/or reporting income has a statistically significant and economically large impact on individual filing and reporting decisions. However, this "neighbour" information does not always improve compliance, depending on the exact content of the information.
    Keywords: Tax evasion, Tax compliance, Behavioural economics, Experimental economics.
    JEL: H26 C91
    Date: 2016–12
  4. By: James Alm (Department of Economics, Tulane University); David M. Bruner (Department of Economics, Appalachian State University); Michael McKee (Department of Economics, Appalachian State University)
    Abstract: In many settings the true likelihood of capture when engaging in an illegal activity, such as tax evasion, is not well known to an individual. "Official" statements from the tax administration regarding enforcement effort provide some information. In addition, "informal", or "unofficial", communication among taxpayers can supplement these official announcements, but individuals do not know with certainty whether such unofficial information is honest (or accurate) versus dishonest (or inaccurate). We examine the truthfulness of an individual's revelation of unofficial information to other individuals, along with the factors that affect any revelation, focusing on the intrinsic motivations for revelations. Our experimental design allows us to examine the type and the honesty of messages that an individual chooses to send to other individuals regarding their own audit outcome and their own compliance behavior. Our results indicate that most individuals send accurate messages about their own audit outcomes and their own compliance behaviors. Nevertheless, many individuals are also systematically dishonest about being audited; that is, we observe a significant tendency for individuals to claim that they were audited when they were not. We also observe a strong interaction between individuals' audit outcomes and their compliance behaviors, so that individuals who engaged in tax evasion and who were audited were more truthful in their communications than those whose tax evasion went undetected.
    Keywords: Tax compliance, Tax audits, Information, Honesty, Experimental economics.
    JEL: H2 H26 C91
    Date: 2016–12
  5. By: Aurélie Bonein; Cécile Bazart
    Abstract: Starting from the observation of taxpayers’ heterogeneity in terms of honesty andof the existence of a perverse social dynamic leading the most honest to evade, wepropose a simple mechanism to restore honesty. In a laboratory experiment, we testthe willingness of subjects to voluntarily contribute to a fund dedicated to financethe fight against tax evasion. This voluntary contribution mechanism, without redis-tribution, is analyzed thanks to several treatments that differ depending on the typeand the level of the required contribution. We show: (i) that a substantial numberof subjects contribute and that the frequency of contribution decreases with the in-crease in the level of contribution; (ii) that the most honest taxpayers are those whocontribute and (iii) that risk aversion deters subjects to contribute, while inequalityaversion encourages them. Finally, in line with the literature on tax evasion, we con-firm that the increase in the audit probability, which is observed only in groups wherethe collective contribution is sufficient, reduces evasion in these groups..
    Date: 2017–01
  6. By: Amit Nigam
    Abstract: The objective of this paper is to review the factors from a viewpoint of social marketing that control taxpayer compliance. To conduct study, 20 years data from across the globe availablebetween 1984 and 2014 was collected. There were too many findings revealed during the study. First, many of the literature applied varied nature of factors, which in turn make the comparison too difficult across numerous studies. Second, numerous researchers lacked in explaining the choice of independent variable as they have carried out the research in the absence of a theoretical framework. Since the presence of a theoretical context increases understanding of the important variables that affect a scenario, hence this paucity creates the gap in the tax literature and did not provide any significant solution on the key determinants of income tax compliance. Third, collective investigation of the literature displayed that the three key determinants of income tax compliance that can be considered as good predictors were normative, attitudinal and subjective control. Further, the outcomes of the study recommend few policy actions that need to be addressed in future research. First, it is suggested that the future research focuses on to develop theory centered number of appropriate determining factor of tax compliance which can measure precise forecasts. Second, it is recommended to tax policy makers todiscontinue from limited practice of the orthodox forced approaches (subjective control variables) usually used to coerce tax compliance. Further, the policy makers are advised to use a controlled method in implementation of tax that can encourage intended compliance through variation of norms and attitudes. Key words: Conceptual, Factorial Review, Determinants, Income Tax Compliance Policy
    Date: 2016–09
  7. By: M. L. Bertotti; G. Modanese
    Abstract: Microscopic models describing a whole of economic interactions in a closed society are considered. The presence of a tax system combined with a redistribution process is taken into account, as well as the occurrence of tax evasion. In particular, the existence is postulated, in relation to the level of evasion, of different individual taxpayer behaviors. The effects of the mentioned different behaviors on shape and features of the emerging income distribution profile are investigated qualitatively and quantitatively. Numerical solutions show that the Gini inequality index of the total population increases when the evasion level is higher, but does not depend significantly on the evasion spread. For fixed spread, the relative difference between the average incomes of the worst evaders and honest taxpayers increases approximately as a quadratic function of the evasion level.
    Date: 2016–12
  8. By: Ana Barufi; Eduardo Haddad; Peter Nijkamp
    Abstract: Agglomeration economies have a relevant impact on local labour markets. The interaction of workers and firms in dense urban areas may generate productivity advantages that result in higher wages. City size has an important impact on the relative bargaining power of workers and firms in the labour market. When analysing the relationship of local wages and the business cycle, wage flexibility, measured by the wage curve, is higher in informal sectors in less dense areas in Brazil. Therefore, large agglomerations are supposed to provide a higher bargaining power for workers, as they have further job opportunities. In addition, labour market dualism is an essential ingredient in the evaluation of the wage curve in developing economies. However, this type of analysis should be conducted in the adequate regional level (labour market areas), mking it possible to find a relevant impact of city size on the relative bargaining power of workers and firms.
    Keywords: wage curve; city size; labour market
    JEL: R23 J31 J46
    Date: 2016–12

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