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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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    Cited by:

    1. Marie Bjørneby & Annette Alstadsæter & Kjetil Telle, 2018. "Collusive Tax Evasion by Employers and Employees: Evidence from a Randomized Field Experiment in Norway," CESifo Working Paper Series 7381, CESifo.
    2. 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.
    3. Mehmet Burak Turgut & Tomasz Tratkiewicz, 2023. "Estimate of the Underground Economy in Poland Based on Household Expenditures and Incomes," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 15(1), pages 1-29, March.
    4. Hasan Altiok & Glenn Jenkins, 2013. "Social security generosity, budgetary deficits and reforms in North Cyprus," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 16(2), pages 218-235.
    5. Ioana Alexandra Horodnic & Colin C. Williams & Rodica Ianole-Cãlin & Adrian V. Horodnic, 2023. "Exploring the illegal practice of under-reporting wages in the construction industry: some lessons from Romania," Applied Economics, Taylor & Francis Journals, vol. 55(26), pages 2978-2992, June.
    6. Tonin, Mirco, 2011. "Minimum wage and tax evasion: Theory and evidence," Journal of Public Economics, Elsevier, vol. 95(11), pages 1635-1651.
    7. Niizeki, Takeshi & Hamaaki, Junya, 2023. "Do the self-employed underreport their income? Evidence from Japanese panel data," Journal of the Japanese and International Economies, Elsevier, vol. 67(C).
    8. Hai Anh La & Duc Anh Dang, 2018. "Income under-reporting and tax evasion: How they impact inequality in Vietnam," WIDER Working Paper Series wp-2018-148, World Institute for Development Economic Research (UNU-WIDER).
    9. Pickhardt, Michael & Prinz, Aloys, 2014. "Behavioral dynamics of tax evasion – A survey," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 1-19.
    10. 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.
    11. Andrew Yim, 2009. "Efficient Committed Budget for Implementing Target Audit Probability for Many Inspectees," Management Science, INFORMS, vol. 55(12), pages 2000-2018, December.
    12. Merike Kukk & Alari Paulus & Karsten Staehr, 2020. "Cheating in Europe: underreporting of self-employment income in comparative perspective," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(2), pages 363-390, April.
    13. Marek Kośny & Jakub Sawulski & Aneta Kiełczewska, 2024. "Measuring the scale of envelope wages: Evidence from Poland," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 32(3), pages 949-970, July.
    14. Amin Sokhanvar & Glenn P. Jenkins & Hasan Ulas Altiok, 2019. "The Political Economy of the Taxation of Individuals in North Cyprus," Development Discussion Papers 2019-01, JDI Executive Programs.
    15. Hasan U. Altiok & Glenn Jenkins, "undated". "The Pension Traps of Northern Cyprus," Development Discussion Papers 2012-03, JDI Executive Programs.
    16. H Xavier Jara & Marcelo Varela, 2019. "Tax-benefit Microsimulation and Income Redistribution in Ecuador," International Journal of Microsimulation, International Microsimulation Association, vol. 12(1), pages 52-82.
    17. Hai Anh La & Duc Anh Dang, 2018. "Income under-reporting and tax evasion: How they impact inequality in Vietnam," WIDER Working Paper Series 148, World Institute for Development Economic Research (UNU-WIDER).
    18. Andrea Lopez-Luzuriaga & Monica Calijuri & Carola Pessino & Simeon Schächtele & Ubaldo Gonzalez & Carla Chamorro, 2024. "Detecting envelope wages with e-billing information," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(1), pages 26-65, February.
    19. 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.
    20. 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.
    21. Andrea Albarea & Michele Bernasconi & Anna Marenzi & Dino Rizzi, 2020. "Income Underreporting and Tax Evasion in Italy: Estimates and Distributional Effects," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 66(4), pages 904-930, December.
    22. 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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