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Tax Progressivity, Income Distribution and Tax Non-Compliance

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Author Info
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)

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

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David Ulph, 2009. "Avoidance Policies – A New Conceptual Framework," Working Papers 0922, Oxford University Centre for Business Taxation. [Downloadable!]
  2. David Ulph, 2009. "Avoidance Policies – A New Conceptual Framework," CRIEFF Discussion Papers 0908, Centre for Research into Industry, Enterprise, Finance and the Firm. [Downloadable!]
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