Since the Global Crisis, many governments around the world have initiated policies against tax evasion and harmful tax avoidance. This column uses data from an Austrian commuter allowance scheme to explore how the design of tax schemes and the social environment affect compliance. A substantial share of employees in the study misreport their commuting distance in order to receive more compensation. Employees also appear to be influenced by the misreporting behaviour of their co-workers, showing how tax evasion can have spillover effects.
Jörg Paetzold, Hannes Winner, 17 December 2016
Emmanuele Bobbio, 05 November 2016
Tax evasion imposes substantial costs on economies around the world. Beyond equity concerns, it erodes the tax base, with indirect effects on public investment and service provision. This column uses a model calibrated on the Italian economy to assess the direct and indirect effects of tax evasion on economic growth. Enforcing taxes would force small businesses to innovate, putting pressure on larger businesses and clearing the market of poorly performing small firms. Tackling tax evasion is thus important not only for equity reasons, but also for efficiency.
Heiner Schumacher, Iris Kesternich, Michael Kosfeld, Joachim Winter, 06 July 2016
Evidence shows that individuals often do not act in a completely selfish manner, but rather take into account the welfare of other parties when making decisions. But how decision-makers trade off costs and benefits when the costs are dispersed among many individuals is unclear. This column discusses new experimental evidence showing that a large fraction of individuals are ‘insensitive to group size’, attaching similar weights to small and large groups. These findings provide a new explanation for a number of empirical patterns, including political and medical decision-making, lobbying, tax evasion, and charity donations.
Valeria Pellegrini, Alessandra Sanelli, Enrico Tosti, 14 March 2016
Balance of payments statistics suggest that assets held abroad are greatly underestimated – particularly for mutual fund shares and bank deposits. This column looks into the role played by tax havens and estimates that unreported financial assets amount to between $6 and $7 trillion. On this figure, the related tax evasion is between $19 and $38 billion a year on capital income, and between $2 and $2.6 trillion on personal income. Recent policy initiatives such as automatic information exchanges constitute real progress, but some critical aspects might jeopardise their effectiveness.
Michael Best, Anne Brockmeyer, Henrik Kleven, Johannes Spinnewijn, Mazhar Waseem, 05 January 2016
Developing economies are characterised by low tax revenue and widespread tax evasion. This column assesses what tax policy instruments governments should use to raise revenue. Optimal tax policy in developing countries may diverge from what is prescribed in standard textbook models. A turnover tax, for instance, is known to distort production decisions but may also to be more difficult to evade than a profit tax, and so can be optimal in high-evasion contexts.
Dominika Langenmayr, 13 November 2015
Voluntary disclosure programmes offer tax evaders the opportunity to come clean with reduced penalties. This column uses data from the US and Germany to examine the merits of such programmes. They are found to increase tax evasion, but also to significantly lower administrative costs, leading to a net increase in tax revenues.
Tim Besley, Anders Jensen, Torsten Persson, 12 February 2015
The Eurozone sovereign debt crisis has highlighted the problem of tax evasion. This column examines the effect of social norms on tax compliance using the UK poll tax as a natural experiment. Comparing councils where tax evasion spiked more during the poll-tax period to those where it spiked less, there was no systematic difference before the poll-tax period. However, once the poll tax was abolished, tax evasion remained higher in the former group, suggesting that high poll-tax non-compliance created a persistent norm of non-compliance.
Dirk Niepelt, 21 January 2015
Recent experience with the zero lower bound on nominal interest rates, and the use of high-denomination notes by criminals and tax evaders, have led to revived proposals to phase out cash. This column argues that abolishing cash may be neither necessary nor sufficient to overcome the zero lower bound problem, and would severely undermine privacy. Allowing the public to hold reserves at central banks could reduce the need for deposit insurance, although the transition to the new regime and the effects on credit supply must be carefully considered.
Athanasios Tagkalakis, 02 December 2014
Greece is currently implementing a fiscal adjustment programme aimed at tackling tax evasion. This column discusses the impact of recent tax administration reforms on tax compliance in Greece. The intensification of audits, enforcement of penalties, and efficient collection of past debts can induce tax compliance and raise the collected revenue. These findings could contribute to the successful conclusion of the fiscal consolidation programme.
Charles Goodhart, Jonathan Ashworth, 08 October 2014
Despite the growth of online and card payments, the ratio of currency to GDP in the UK has been rising. This column argues that rapid growth in the grey economy has been a key cause. The authors estimate that the grey economy in the UK could have expanded by around 3% of UK GDP since the beginning of the Global Crisis.
Francesco Pappadà, Yanos Zylberberg, 03 February 2014
Greece’s austerity package included an unprecedented increase in the VAT rate, but the resulting increase in revenue was much lower than expected. This column links this disappointing result to the ‘transparency response’ of firms to higher tax rates. In countries like Greece with poor tax monitoring, firms face a tradeoff when deciding whether to declare their activity. Transparency is a necessary condition for accessing external finance, but it also means having to pay tax. Improving credit conditions for small and medium-size Greek firms might shift this tradeoff in favour of transparency.
Wojciech Kopczuk, Justin Marion, Erich Muehlegger, Joel Slemrod, 30 September 2013
Tax evasion and noncompliance reduce government revenue and exacerbate the problem of increasing debt. Standard economic theory predicts that the identity of the tax remitter shouldn’t affect outcomes – but this ignores the possibility of evasion. This column provides evidence that in the presence of evasion, both the amount of revenue collected and the incidence of burden are sensitive to the identity of the remitter. These results should inform future tax reform.
Maurizio Bovi, 02 December 2011
The countries most affected by the Eurozone debt crisis seem also to be characterised by bad institutions and large shadow economies. This column describes the bad equilibrium in which bad governments offer few and low-quality public services and make people less willing to pay for services. Firms stay underground, public receipts stay low, and governments remain inefficient. In sum, the presence of inept bureaucracy may be strongly associated with the shadow economy.
Thorsten Beck, Chen Lin, Yue Ma, 13 October 2010
Can financial sector reform help bring informal firms into the formal sector? This column examines over 22,000 firms from 43 countries. Firms in countries with a credit registry are 20% less likely to evade taxes, and the tax evasion ratio in such countries is 11% lower.
Maurizio Bovi, 30 May 2010
Europe’s highly indebted countries – Portugal, Italy, Ireland, Greece, and Spain – also face the problem of tax evasion. This column analyses how governments can tackle their fiscal deficits while reducing the possibility of forcing activity underground. It suggests that fewer, better paid public workers could complement tax cuts in fighting tax evasion.
Yuriy Gorodnichenko, Jorge Martinez-Vazquez, Klara Sabirianova Peter, 19 February 2008
Russia’s economic and fiscal successes since adopting a flat tax in 2001 have bred enthusiasm for tax reform amongst casual observers. This column summarises research investigating the flat tax’s effects and suggests that many of the gains came from reduced tax evasion in Russia.