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Tax compliance: when do employees behave like the self-employed?

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  • Mustafa Besim
  • Glenn Jenkins

Abstract

Previous studies of the underreporting of income for tax purposes have used private employees as the benchmark to which other groups' compliance was measured. In this paper it is suggested that there are a number of circumstances when there will be an incentive for private employees and their employers to collude to understate employee wages and salaries for purposes of taxation. The existence of high marginal tax rates of income tax combined with high social security payroll taxes are the typical conditions that stimulate this behaviour. These conditions are present in North Cyprus. This paper examines a rich source of household consumption expenditure and income data for North Cyprus that allows one to separate out the consumption expenditures made by the self-employed, private employees and civil servants over specific periods of time. From the comparison of consumption expenditures on food by these three groups it is possible to estimate how much self-employed and the private employees understated their incomes as compared to the civil servants. It is found that in North Cyprus private employees understate their incomes by approximately the same proportion of their incomes as do the self-employed.

Suggested Citation

  • Mustafa Besim & Glenn Jenkins, 2005. "Tax compliance: when do employees behave like the self-employed?," Applied Economics, Taylor & Francis Journals, vol. 37(10), pages 1201-1208.
  • Handle: RePEc:taf:applec:v:37:y:2005:i:10:p:1201-1208
    DOI: 10.1080/00036840500109407
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    References listed on IDEAS

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    1. Apel,M., 1994. "An Expenditure-Based Estimate of Tax Evasion in Sweden," Papers 1, Uppsala - Working Paper Series.
    2. Robin Boadway & Nicolas Marceau & Steeve Mongrain, 2002. "Joint tax evasion," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 417-435, August.
    3. Bovenberg, A L, 2003. "Financing Retirement in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(6), pages 713-734, November.
    4. Lang, Oliver & Nohrba[ss], Karl-Heinz & Stahl, Konrad, 1997. "On income tax avoidance: the case of Germany," Journal of Public Economics, Elsevier, vol. 66(2), pages 327-347, November.
    5. Glenn Jenkins, 2001. "Diagnostic and Proposal for the Reform of the Personal Income Tax System in the TRNC," Development Discussion Papers 2001-01, JDI Executive Programs.
    6. Pissarides, Christopher A. & Weber, Guglielmo, 1989. "An expenditure-based estimate of Britain's black economy," Journal of Public Economics, Elsevier, vol. 39(1), pages 17-32, June.
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    Citations

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    Cited by:

    1. Paulus, Alari, 2015. "Tax evasion and measurement error: An econometric analysis of survey data linked with tax records," ISER Working Paper Series 2015-10, Institute for Social and Economic Research.
    2. Andrew Yim, 2009. "Efficient Committed Budget for Implementing Target Audit Probability for Many Inspectees," Management Science, INFORMS, vol. 55(12), pages 2000-2018, December.
    3. Hasan U. Altiok & Glenn Jenkins, "undated". "The Pension Traps of Northern Cyprus," Development Discussion Papers 2012-03, JDI Executive Programs.
    4. Tonin, Mirco, 2011. "Minimum wage and tax evasion: Theory and evidence," Journal of Public Economics, Elsevier, vol. 95(11), pages 1635-1651.
    5. Hasan U. Altiok & Glenn P. Jenkins, 2013. "Social security generosity, budgetary deficits and reforms in North Cyprus," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 16(2), pages 218-235, June.
    6. Hasan U. Altiok & Glenn Jenkins, 2012. "Social Security Reforms in Northern Cyprus: Are they Fiscally Balanced and Socially Equitable?," Development Discussion Papers 2012-02, JDI Executive Programs.
    7. Pickhardt, Michael & Prinz, Aloys, 2014. "Behavioral dynamics of tax evasion – A survey," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 1-19.
    8. Bame-Aldred, Charles W. & Cullen, John B. & Martin, Kelly D. & Parboteeah, K. Praveen, 2013. "National culture and firm-level tax evasion," Journal of Business Research, Elsevier, vol. 66(3), pages 390-396.
    9. Paulus, Alari, 2015. "Income underreporting based on income-expenditure gaps: survey vs tax records," ISER Working Paper Series 2015-15, Institute for Social and Economic Research.
    10. Tufan Ekici & Mustafa Besim, 2016. "A Measure of the Shadow Economy in a Small Economy: Evidence from Household-Level Expenditure Patterns," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(1), pages 145-160, March.

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