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Tax Progressivity, Income Distribution and Tax Non-Compliance

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  • Tatiana Damjanovic
  • David Ulph

Abstract

This article applies a traditional industrial organization framework to the issue of tax compliance. First, we model the "tax advice" industry where the supplier helps taxpayers reduce their tax liability. Then we exploit the fact that more convex demand function results in lower equilibrium price and higher equilibrium quantity. Finally we uncover the factors determining the convexity of the demand for the tax minimisation industry and hence the equilibrium price and output. In particular, we find that lower pre-tax income inequality as well as a less progressive tax code may cause more tax minimisation activities. Therefore, the reduction of 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 penalty and monitoring functions.

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Paper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 200712.

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Date of creation: 15 Sep 2007
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Handle: RePEc:san:wpecon:0712

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

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Citations

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Cited by:
  1. 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.
  2. Bach, Stefan & Corneo, Giacomo & Steiner, Viktor, 2012. "Optimal top marginal tax rates under income splitting for couples," European Economic Review, Elsevier, vol. 56(6), pages 1055-1069.
  3. Fernando, Estrada, 2010. "A reading Hayek on power to tax," MPRA Paper 21526, University Library of Munich, Germany.
  4. Fernando Estrada, 2011. "The Power to Tax: A Lecture of Hayek," Economic Research Guardian, Weissberg Publishing, vol. 1(1), pages 2-14, September.
  5. Lipatov, Vilen, 2005. "Corporate Tax Evasion: the Case for Specialists," MPRA Paper 14181, University Library of Munich, Germany, revised Mar 2009.
  6. Estrada, Fernando, 2011. "The power to tax," MPRA Paper 33203, University Library of Munich, Germany.
  7. David Ulph, 2009. "Avoidance Policies – A New Conceptual Framework," Working Papers 0922, Oxford University Centre for Business Taxation.
  8. Estrada, Fernando & González, Jorge Iván, 2014. "Política tributaria y economía fiscal en los enfoques de Hayek y Brenann/Buchanan
    [Tax policy and fiscal economy approaches Hayek and Brennan / Buchanan]
    ," MPRA Paper 57123, University Library of Munich, Germany.
  9. 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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