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Tax Progressivity, Income Distribution and Tax Non-Compliance

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  • Tatiana Damjanovic

    ()
    (University of St. Andrews St Salvator’s College)

  • David Ulph

    ()
    (University of St. Andrews St Salvator’s College, Oxford University Centre for Business Taxation)

Abstract

This article examines the determinants of tax non-compliance when we recognise the existence of an imperfectly competitive "tax advice" industry supplying schemes which help taxpayers reduce their tax liability. We apply a traditional industrial organisation framework to model the behaviour of this industry. This tells us that an important factor determining the equilibrium price and hence, the level of noncompliance, is the convexity of the demand schedule. We show that in this context, this convexity is affected by the distribution of pre-tax income, the progressivity of the tax-schedule and the way in which monitoring and penalties vary with income. It is shown that lower pre-tax income inequality as well as a less progressive tax code may cause more tax minimisation activities. Therefore, the frequently advocated policy of reducing the highest tax rate may fail as a policy directed at improving tax discipline. One way of offsetting the possible harm to tax compliance from a less progressive tax could be an adjustment of the penalty and monitoring functions.

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Bibliographic Info

Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0928.

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Date of creation: 2009
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Handle: RePEc:btx:wpaper:0928

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Keywords: tax compliance; tax administration; inequality; tax progressivity; tax monitoring; penalty function;

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Cited by:
  1. Estrada, Fernando, 2010. "The power to tax: a lecture of Hayek," MPRA Paper 31384, University Library of Munich, Germany, revised 2011.
  2. Lipatov, Vilen, 2012. "Corporate tax evasion: The case for specialists," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 185-206.
  3. Bach, Stefan & Corneo, Giacomo & Steiner, Viktor, 2011. "Optimal top marginal tax rates under income splitting for couples," Discussion Papers 2011/21, Free University Berlin, School of Business & Economics.
  4. Fernando, Estrada, 2010. "A reading Hayek on power to tax," MPRA Paper 21526, University Library of Munich, Germany.
  5. David Ulph, 2009. "Avoidance Policies – A New Conceptual Framework," Working Papers 0922, Oxford University Centre for Business Taxation.
  6. Estrada, Fernando, 2011. "The power to tax," MPRA Paper 33203, University Library of Munich, Germany.
  7. Estrada, Fernando, 2010. "Política tributaria y economía fiscal La posición Hayek (1959, 1979) con comentarios de Brenann/Buchanan (1980)
    [Fiscal tax policy and economy]
    ," MPRA Paper 20094, University Library of Munich, Germany.
  8. David Ulph, 2009. "Avoidance Policies – A New Conceptual Framework," CRIEFF Discussion Papers 0908, Centre for Research into Industry, Enterprise, Finance and the Firm.

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