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Tax Evasion, Information Reporting, and the Regressive Bias Hypothesis

  • Simon Halphen Boserup

    (Department of Economics, University of Copenhagen)

  • Jori Veng Pinje

    (Department of Economics, University of Copenhagen)

A robust prediction from the tax evasion literature is that optimal auditing induces a regressive bias in effective tax rates compared to statutory rates. If correct, this will have important distributional consequences. Nevertheless, the regressive bias hypothesis has never been tested empirically. Using a unique data set, we provide evidence in favor of the regressive bias prediction but only when controlling for the tax agency's use of third-party information in predicting true incomes. In aggregate data, the regressive bias vanishes because of the systematic use of third-party information. These results are obtained both in simple reduced-form regressions and in a data-calibrated state-of-the-art model.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 2010-13.

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Length: 29 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:kud:epruwp:10-13
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  1. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
  2. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June.
  3. Brian Erard & Jonathan Feinstein, 1993. "Honesty and Evasion in the Tax Compliance Game," Carleton Economic Papers 93-06, Carleton University, Department of Economics, revised 1994.
  4. Richard Rogerson & Johanna Wallenius, 2007. "Micro and Macro Elasticities in a Life Cycle Model With Taxes," NBER Working Papers 13017, National Bureau of Economic Research, Inc.
  5. Cremer, H. & Marchand, M. & Pestieau, P., 1988. "Evading, Auditing And Taxing: The Equity-Compliance Tradeoff," Papers 401, Cornell - Department of Economics.
  6. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
  7. Lars P. Feld & Bruno S. Frey, 2000. "Trust Breeds Trust: How Taxpayers are Treated," CESifo Working Paper Series 322, CESifo Group Munich.
  8. Nahum D. Melumad & Dilip Mookherjee, 1989. "Delegation as Commitment: The Case of Income Tax Audits," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 139-163, Summer.
  9. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
  10. Scotchmer, Suzanne, 1987. "Audit Classes and Tax Enforcement Policy," American Economic Review, American Economic Association, vol. 77(2), pages 229-33, May.
  11. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 749-804.
  12. Alm, James & McClelland, Gary H. & Schulze, William D., 1992. "Why do people pay taxes?," Journal of Public Economics, Elsevier, vol. 48(1), pages 21-38, June.
  13. Yitzhaki, Shlomo, 1974. "Income tax evasion: A theoretical analysis," Journal of Public Economics, Elsevier, vol. 3(2), pages 201-202, May.
  14. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March.
  15. Scotchmer, Suzanne, 1992. "The Regressive Bias in Tax Enforcement," Public Finance = Finances publiques, , vol. 47(Supplemen), pages 366-71.
  16. Dina Pomeranz, 2013. "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax," NBER Working Papers 19199, National Bureau of Economic Research, Inc.
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