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Too low to be true: the use of minimum thresholds to fight tax evasion

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  • Tonin, Mirco

Abstract

The enforcement of compliance with tax regulation is a complex task. This is particularly the case when the administrative capacity of the tax authority is low, as it often happens in developing and transition countries. This paper draws on some international experiences in fighting tax evasion to identify tools that can be used to reduce underreporting by employed labor, small and medium enterprises, self-employed, and professionals. In particular, I analyze the use of minimum thresholds, where taxpayers cannot declare an income below a certain amount or, alternatively, are subject to a higher probability of an audit if they decide to do so. First, I model the impact of minimum thresholds by explicitly taking into account low administrative capacity. The model shows that introducing a threshold creates a spike and a "missing middle" in the distribution of declared incomes and highlights under which conditions a threshold is likely to increase net revenues. I then analyze two policies used to fight underreporting: the Italian "Business Sector Analysis" and the Bulgarian "Minimum Social Insurance Thresholds". The Italian tax authority infers "normal" revenues and compensations by small and medium enterprises, self-employed, and professionals from indicators that are difficult to conceal or manipulate. In case the taxpayer decides to declare less than the "normal" level, the probability of an audit increases and the burden of proof is reversed. Bulgaria has established a system of differentiated minimum social insurance thresholds depending on sector and profession, so that social security contributions cannot be lower than the ones implied by the threshold. To conclude, I appraise the applicability of these two systems in other countries.

(This abstract was borrowed from another version of this item.)

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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 1018.

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Date of creation: 01 Jan 2010
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Handle: RePEc:stn:sotoec:1018

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  1. Richard M. Bird, 2014. "Administrative Dimensions of Tax Reform," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 963-992, November.
  2. Yitzhaki, Shlomo, 1974. "Income tax evasion: A theoretical analysis," Journal of Public Economics, Elsevier, vol. 3(2), pages 201-202, May.
  3. Konstantin Pashev, 2006. "Presumptive Taxation: Lessons from Bulgaria," Post-Communist Economies, Taylor & Francis Journals, vol. 18(4), pages 399-418.
  4. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
  5. Erard, Brian, 1997. "Self-selection with measurement errors A microeconometric analysis of the decision to seek tax assistance and its implications for tax compliance," Journal of Econometrics, Elsevier, vol. 81(2), pages 319-356, December.
  6. Macho-Stadler, Ines & Perez-Castrillo, J David, 1997. "Optimal Auditing with Heterogeneous Income," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 951-68, November.
  7. Bahl, Roy W. & Bird, Richard M., 2008. "Tax Policy in Developing Countries: Looking Backā€”and Forward," National Tax Journal, National Tax Association, vol. 61(2), pages 279-301, June.
  8. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
  9. Gindling, T.H. & Terrell, Katherine, 2007. "The effects of multiple minimum wages throughout the labor market: The case of Costa Rica," Labour Economics, Elsevier, vol. 14(3), pages 485-511, June.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How to fight tax evasion
    by Economic Logician in Economic Logic on 2010-12-30 16:48:00
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Cited by:
  1. Laszlo Goerke, 2014. "Income Tax Buyouts and Income Tax Evasion," CESifo Working Paper Series 4613, CESifo Group Munich.
  2. Mirco Tonin, 2013. "Underreporting of earnings and the minimum wage spike," IZA Journal of European Labor Studies, Springer, vol. 2(1), pages 1-18, December.

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