Mobility, Competition, and the Distributional Effects of Tax Evasion
AbstractThe standard assumption underlying the incidence of tax evasion is that the beneficiaries are those who successfully evade their taxes. However, a general equilibrium process of adjustment should occur through changes in the relative prices of both commodities and factors of production as resources move into and out of the relevant activities, and these changes should tend to reduce any initial benefit from evasion. In this paper we analyze these incidence effects, using a computable general equilibrium model of an economy with a formal (and taxed) sector and an informal (and untaxed) sector, in order to examine how much of the initial benefit of income tax evasion is retained by the evaders and how much is shifted via factor and commodity price changes stemming from mobility. Our simulation results show that the household that successfully evades its income tax liabilities has a post-evasion welfare that is only slightly higher than its post-tax welfare if it had fully complied with taxes. Further, while this household keeps some of its initial increase in welfare, a large percentage of this initial gain is competed away as a result of mobility that reflects competition and entry into the informal sector. Consequently, the evading household benefits only marginally from successful income tax evasion, and this advantage diminishes with mobility via competition/entry in the informal sector.
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Bibliographic InfoPaper provided by Tulane University, Department of Economics in its series Working Papers with number 1108.
Length: 41 pages
Date of creation: Apr 2011
Date of revision:
tax evasion; computable general equilibrium model; social accounting matrix;
Other versions of this item:
- Alm, James & Sennoga, Edward B., 2010. "Mobility, Competition, And The Distributional Effects Of Tax Evasion," National Tax Journal, National Tax Association, vol. 63(4), pages 1055-84, December.
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-04-23 (Accounting & Auditing)
- NEP-ALL-2011-04-23 (All new papers)
- NEP-CMP-2011-04-23 (Computational Economics)
- NEP-URE-2011-04-23 (Urban & Real Estate Economics)
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- Yiqun Wang, 2012. "Competition and Tax Evasion: A Cross Country Study," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 42(2), pages 189-208, September.
- Doerrenberg, Philipp & Duncan, Denvil, 2014. "Tax Incidence in the Presence of Tax Evasion," IZA Discussion Papers 8137, Institute for the Study of Labor (IZA).
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