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Tax Evasion and Self-Employment Decisions: Evidence from an Income Tax Reform in Chile

Author

Listed:
  • Sebastián Castillo

    (University of Helsinki, Helsinki GSE, the Finnish Centre of Excellence in Tax Systems Research (FIT), and the Network on Welfare and Policy in Latin America and the Caribbean (WAPLAC))

  • Romina Safojan

    (Tilburg School of Economics and Management, Tilburg University)

Abstract

This paper studies the causal efect of income tax evasion opportunities on the selfemployment decision. Two peculiarities of the Chilean scheme enable us to identify this efect. First, in the Chilean tax design, self-employed and wage-earners are levied with equal marginal taxes, eliminating the diferential tax efect. We disentangle two channels through an occupational choice model: taxable income and evasion. Second, we exploit a tax reform that exogenously afects agents’ evasion decisions. Following a consumption-based approach, we obtain a tax evasion measure, and estimate two behavioral parameters: (i) the evasion elasticity to marginal tax rate equals 1.4; (ii) an increase of 1 percentage point in the evasion opportunity makes being self-employed 6.1 percentage points more likely. The evasion opportunity is a crucial determinant of the self-employment response to the policy change, mainly driven by agents’ behavior near the frst income bracket. While women-headed households’ evasion behavior is less sensitive to a tax change, having higher education primarily drives this behavior.

Suggested Citation

  • Sebastián Castillo & Romina Safojan, 2024. "Tax Evasion and Self-Employment Decisions: Evidence from an Income Tax Reform in Chile," Working Papers 31, Finnish Centre of Excellence in Tax Systems Research.
  • Handle: RePEc:fit:wpaper:31
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    References listed on IDEAS

    as
    1. Jean-François Wen & Daniel V. Gordon, 2014. "An Empirical Model of Tax Convexity and Self-Employment," The Review of Economics and Statistics, MIT Press, vol. 96(3), pages 471-482, July.
    2. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2016. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," Economica, London School of Economics and Political Science, vol. 83(330), pages 219-246, April.
    3. Bosch, Nicole & de Boer, Henk-Wim, 2019. "Income and occupational choice responses of the self-employed to tax rate changes: Heterogeneity across reforms and income," Labour Economics, Elsevier, vol. 58(C), pages 1-20.
    4. Dina Pomeranz & José Vila-Belda, 2019. "Taking State-Capacity Research to the Field: Insights from Collaborations with Tax Authorities," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 755-781, August.
    5. Schuetze, Herb J., 2000. "Taxes, economic conditions and recent trends in male self-employment: a Canada-US comparison," Labour Economics, Elsevier, vol. 7(5), pages 507-544, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Tax evasion; Occupational choice; Self-employment; Tax policy; Chile;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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