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

  • Mustafa Besim
  • Glenn Jenkins

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.

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 37 (2005)
Issue (Month): 10 ()
Pages: 1201-1208

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Handle: RePEc:taf:applec:v:37:y:2005:i:10:p:1201-1208
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  1. 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.
  2. 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.
  3. Robin Boadway & Nicolas Marceau & Steeve Mongrain, 2002. "Joint tax evasion," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 417-435, August.
  4. Lans Bovenberg, 2002. "Financing Retirement in the European Union," CESifo Working Paper Series 643, CESifo Group Munich.
  5. 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.
  6. Apel,M., 1994. "An Expenditure-Based Estimate of Tax Evasion in Sweden," Papers 1, Uppsala - Working Paper Series.
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