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Multiple Modes of Tax Evasion: Theory and Evidence from the TCMP

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Abstract

In general, theoretical and empirical studies of tax compliance conclude that increasing penalties and detection probabilities increase compliance. However, these conclusions are based on relatively simple models with a single mode of tax evasion. In this paper, we examine the theoretical and empirical implications of accounting for multiple modes of tax evasion. We find that an increase in enforcement effort in one mode has an ambiguous effect on compliance in the targeted mode as well as the other mode. In order to gain greater insight into taxpayer behavior, we use the 1985 TCMP to estimate an empirical model with two modes of evasion: income reporting and deductions reporting compliance. We find that taxpayers use alternative modes of evasion as substitutes. In other words, an increase in enforcement effort in a given mode leads to an increase in compliance in the targeted mode and a decrease in compliance in the other mode. We use our empirical estimates of the parameters in the model to conduct several simulations. We find that the net revenue effect of increased enforcement effort is positive.

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Bibliographic Info

Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper0306.

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Length: 50 pages
Date of creation: 01 Mar 2003
Date of revision:
Handle: RePEc:ays:ispwps:paper0306

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Keywords: Tax; Tax Evasion; Tax Theory; Tax Evidence;

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References

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  1. Friedland, Nehemiah & Maital, Shlomo & Rutenberg, Aryeh, 1978. "A simulation study of income tax evasion," Journal of Public Economics, Elsevier, vol. 10(1), pages 107-116, August.
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  17. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March.
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Citations

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Cited by:
  1. James Alm & Benno Torgler, 2012. "Do Ethics Matter? Tax Compliance and Morality," Working Papers 1207, Tulane University, Department of Economics.
  2. Yuriy Gorodnichenko & Jorge Martinez-Vazquez & Klara Sabirianova Peter, 2009. "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 504-554, 06.
  3. Laszlo Goerke, 2006. "Bureaucratic Corruption and Profit Tax Evasion," CESifo Working Paper Series 1666, CESifo Group Munich.
  4. Laszlo Goerke, 2006. "Corporate and Personal Income Tax Declarations," CESifo Working Paper Series 1781, CESifo Group Munich.
  5. Roberto José Arias, 2004. "Reglas de selección para la fiscalización de Impuestos a las Ventas," Revista de Economía y Estadística, Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas, vol. 0(2), pages 29-62, July.
  6. Lars P. Feld & Bruno S. Frey, 2007. "Tax Evasion, Tax Amnesties and the Psychological Tax Contract," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0729, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  7. Ines Macho-Stadler & David Perez-Castrillo, 2000. "Auditing with Signals," Econometric Society World Congress 2000 Contributed Papers 0660, Econometric Society.
    • Macho-Stadler, Ines & Perez-Castrillo, J David, 2002. "Auditing with Signals," Economica, London School of Economics and Political Science, vol. 69(273), pages 1-20, February.
  8. Lucy F. Ackert & Ann B. Gillette & Jorge Martinez-Vazquez & Mark Rider, 2009. "Risk Tolerance, Self-Interest, and Social Preferences," Experimental Economics Center Working Paper Series 2009-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University, revised Feb 2011.
  9. Yuriy Gorodnichenko & Jorge Martinez-Vazquez & Klara Sabirianova Peter, 2007. "Myth and Reality of Flat Tax Reform: Tax Evasion and Real Side Response of Russian Households," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0728, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  10. Robina Ather Ahmed & Mark Rider, 2008. "Pakistan’s Tax Gap: Estimates By Tax Calculation and Methodology," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0811, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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