Many countries apply lower fines to tax evading individuals when they voluntarily disclose the tax evasion they committed. I model such voluntary disclosure mechanisms theoretically and show that ...while such mechanisms increase the incentive to evade taxes, they nevertheless increase tax revenues net of administrative costs. I confirm the importance of administrative costs in a survey of German competent local tax authorities. I then test the effects of voluntary disclosure on the tax evasion decision, using the introduction of the 2009 offshore voluntary disclosure program in the U.S. for identification. The analysis confirms that the introduction of voluntary disclosure increases tax evasion.
SOCIAL NORMS AND THE ENFORCEMENT OF LAWS Acemoglu, Daron; Jackson, Matthew O.
Journal of the European Economic Association,
04/2017, Volume:
15, Issue:
2
Journal Article
Peer reviewed
We examine the interplay between social norms and the enforcement of laws. Agents choose a behavior (e.g., tax evasion, production of low-quality products, corruption, harassing behavior, substance ...abuse, etc.) and then are randomly matched with another agent. There are complementarities in behaviors so that an agent’s payoff decreases with the mismatch between her behavior and her partner’s, and with overall negative externalities created by the behavior of others. A law is an upper bound (cap) on behavior. A law-breaker, when detected, pays a fine and has her behavior forced down to the level of the law. Equilibrium law-breaking depends on social norms because detection relies, at least in part, on whistle-blowing. Law-abiding agents have an incentive to whistle-blow on a law-breaking partner because this reduces the mismatch with their partners’ behaviors as well as the negative externalities. When laws are in conflict with norms and many agents are breaking the law, each agent anticipates little whistle-blowing and is more likely to also break the law. Tighter laws (banning more behaviors), greater fines, and better public enforcement, all have counteracting effects, reducing behavior among law-abiding individuals but increasing it among law-breakers. We show that laws that are in strong conflict with prevailing social norms may backfire, whereas gradual tightening of laws can be more effective in influencing social norms and behavior.
This study identifies factors that may have influenced the degree of aggregate federal personal income tax evasion in the U.S. An established tax evasion model is updated to include the most recent ...data available and augmented with the addition of heretofore neglected or overlooked explanatory variables. To measure the degree of aggregate tax evasion behaviour, we adopt the percentage of personal taxable income that was unreported to the IRS by using official time series data for the years 1980 through 2016. We incorporate previously resilient variables such as the federal tax rate, the unemployment rate, the audit rate of filed returns by IRS personnel, the penalty interest rate on detected tax evasion, and a measure of real income growth into our study. Each has a statistically significant impact on the degree of aggregate federal personal income tax evasion, consistent with prior literature. As an extension of the literature, we find compelling evidence that age, gender, the average effective state income tax rate, and the percentages of federal personal income tax returns that include Schedule C and/or Schedule A are additional variables that have been largely ignored in previous related studies but appear to have impacted tax evasion behaviour.
We empirically investigate one form of illegal investor-level tax evasion and its effect on foreign portfolio investment. In particular, we examine a form of round-tripping tax evasion in which U.S. ...individuals hide funds in entities located in offshore tax havens and then invest those funds in U.S. securities markets. Employing Becker's (1968) economic theory of crime, we identify the tax evasion component by examining how foreign portfolio investment varies with changes in the incentives to evade and the risks of detection. To our knowledge, this is the first empirical evidence of investorlevel tax evasion affecting cross-border equity and debt investment.
This paper analyzes a tax enforcement field experiment in Denmark. In the base year, a stratified and representative sample of over 40,000 individual income tax filers was selected for the ...experiment. Half of the tax filers were randomly selected to be thoroughly audited, while the rest were deliberately not audited. The following year, threat-of-audit letters were randomly assigned and sent to tax filers in both groups. We present three main empirical findings. First, using baseline audit data, we find that the tax evasion rate is close to zero for income subject to third-party reporting, but substantial for self-reported income. Since most income is subject to third-party reporting, the overall evasion rate is modest. Second, using quasi-experimental variation created by large kinks in the income tax schedule, we find that marginal tax rates have a positive impact on tax evasion for self-reported income, but that this effect is small in comparison to legal avoidance and behavioral responses. Third, using the randomization of enforcement, we find that prior audits and threat-of-audit letters have significant effects on self-reported income, but no effect on third-party reported income. All these empirical results can be explained by extending the standard model of (rational) tax evasion to allow for the key distinction between self-reported and third-party reported income.
The downward trend in capital taxes since the 1980s has recently reversed for personal capital income. At the same time, it continued for corporate profits. Why have these tax rates diverged after a ...long period of parallel decline? We argue that the answer lies in different levels of change in the fights against tax evasion and tax avoidance. The fight against evasion by households progressed significantly since 2009, culminating in the multilateral adoption of automatic exchange of information (AEI). In contrast, international efforts against base erosion and profit shifting (BEPS) failed to curb tax avoidance by corporations. We theorize that international cooperation is an intervening variable, countering the negative impact of tax competition on capital taxation by reducing the risk of capital flight. Under such conditions, domestic political pressures in favor of higher capital taxes can unfold. We confirm our argument in a difference-in-difference analysis and through additional tests with data for up to 35 OECD countries from 2000-2017. Our central estimate suggests that the average tax rate on dividends in 2017 is 4.5 percentage points higher than it would have been absent international tax cooperation.
Tax avoidance and evasion in a dynamic setting Gamannossi degl’Innocenti, Duccio; Levaggi, Rosella; Menoncin, Francesco
Journal of economic behavior & organization,
December 2022, 2022-12-00, Volume:
204
Journal Article
Peer reviewed
•The taxpayer optimally chooses avoidance and evasion in a dynamic setting.•Avoidance only depends on its probability of success, its cost, and the tax rate.•Since tax audits are unable to deter ...avoidance, ad-hoc policies are needed.•Deterring avoidance might increase evasion to the point of reducing revenues.•A Laffer curve for revenues may arise due to opposite avoidance and evasion effects.
We study an intertemporal utility maximization problem where taxpayers can engage in both tax avoidance and tax evasion. Evasion is costless but is fined if discovered, while avoidance is costly but might be successful (i.e. deemed legitimate) with a given probability (β) upon audit. We find that traditional deterrence instruments (fine and frequency of audit) reduce optimal evasion but, in contrast with results in a static framework, they have no impact on optimal avoidance. In fact, tax avoidance depends negatively on its marginal cost and positively on both its probability of success (β) and the tax rate. We show that non-compliance behavior may result in a Laffer curve for fiscal revenues and that the revenue maximizing tax rate is lower the higher β. We characterize the optimal level of β by taking into account different government objectives: minimizing evasion, minimizing non-compliance (evasion plus avoidance), or maximizing revenues. Our results suggest that specific policies (e.g., tax simplification) need to be implemented to deter avoidance and we illustrate their impact on evasion.
We develop an agency model explaining why third-party information reporting by firms makes tax enforcement successful. While third-party reporting would be ineffective with frictionless collusion ...between firms and employees, collusive evasion is impossible to sustain in firms with many employees and accurate business records as any single employee may reveal evasion. We embed our agency model into a macro model where the number of employees grows with development, showing that the tax take evolves as an S-shape driven by changes in third-party information. We show that our model is consistent with a set of stylized facts on taxation and development.
•Citizenship-by-investment programs can be used to circumvent tax information exchange.•We indirectly test this empirically with bilateral data on cross-border bank deposits.•Deposits in havens ...increase when a country offers a citizenship-by-investment program.•Use of such programs increased after introduction of the common reporting standard.
With automatic exchange of tax information among countries now common, tax evaders have had to find new ways to hide their offshore holdings. One such way is citizenship-by-investment, which offers foreigners a new passport for a local investment or a fixed fee. We show analytically that high-income individuals acquire a new citizenship to lower the probability that their tax evasion is detected through information exchange. Using data on cross-border bank deposits, we find that deposits in tax havens increase after a country starts offering a citizenship-by-investment program, providing indirect evidence that tax evaders use these programs.
We study extrinsic and intrinsic motivations for tax compliance in the context of a local church tax in Germany. This tax system has historically relied on zero deterrence so that any compliance at ...baseline is intrinsically motivated. Starting from this zero deterrence baseline, we implement a field experiment that incentivized compliance through deterrence or rewards. Using administrative records of taxes paid and true tax liabilities, we use these treatments to document that intrinsically motivated compliance is substantial, that a significant fraction of it may be driven by duty-to-comply preferences, and that there is no crowd-out between extrinsic and intrinsic motivations.
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