TAXATION

Taxation



Taxation

Over the years, numerous studies have emerged, analyzing the underground economy in developing and developed countries, as well as in countries in transition from socialist to market oriented economies. In this study, we focus on one of the phenomena related to the underground economy: tax evasion. There are two main reasons. First, it is directly linked to large budget deficits and hence to lower investments in public goods. Aside from being of general interest from an economic point of view, this means that the effects may differ significantly depending on a country's level of development. Second, studying tax evasion creates the opportunity to investigate the decision-making process related to the underground economy at the individual level.

In this paper, we have discussed the treatment of various account heads for income tax purposes. Complexity is often considered to be an undesirable feature of the tax system, but this is usually postulated rather than derived from an economic model and its relationship to other criteria for evaluating tax policy is unclear. A recent paper of Slemrod and Kopczuk (2002) provides a specific framework for analyzing the cost of complexity in the tax system by interpreting it in terms of the income tax base. A simple income tax is characterized by few deductions and, therefore, a broad tax base. Broadening the tax base increases revenue and affects administrative costs, but more subtly it may also affect the excess burden of taxation: in their model, a broader tax base is associated with a lower elasticity of taxable income and therefore with lower excess burden. Thus, in that framework, simplicity of the tax system directly affects the efficiency cost of taxation.

This elasticity is the key parameter necessary to evaluate the deadweight loss of the income tax. My results highlight though that it is not a structural parameter depending only on underlying preferences and technology, but instead it depends on a non-rate aspect of the tax system (tax base) that can be manipulated by policy makers. This effect is not just theoretically possible, it also turns out to be empirically relevant. Consequently, the results indicate that the marginal deadweight loss of taxation can be controlled by policy makers. In particular, and as an illustration, I can assess potential efficiency gains resulting from a change to a broad-base low-rate tax system.

When studying tax evasion, it is important to distinguish between different types of income. In almost every country, one can make a distinction between income that is officially registered and unregistered income. Typically, taxes are withheld from the regular wage payments when income is registered (e.g., in the public sector). Unregistered income can occur where there is no job contract and in case of self-employment. Income of this type must be self-reported to the tax authorities in order to determine the income tax owed. Because it is easier to evade taxes in case of unregistered income, there may be individual incentives to choose a job with this type of ...