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Tax Progressivity, Income Distribution and Tax Non-Compliance

  • Tatiana Damjanovic
  • David Ulph

This article applies a traditional industrial organization framework to the issue of tax compliance. First, we model the "tax advice" industry where the supplier helps taxpayers reduce their tax liability. Then we exploit the fact that more convex demand function results in lower equilibrium price and higher equilibrium quantity. Finally we uncover the factors determining the convexity of the demand for the tax minimisation industry and hence the equilibrium price and output. In particular, we find that lower pre-tax income inequality as well as a less progressive tax code may cause more tax minimisation activities. Therefore, the reduction of the highest tax rate may fail as a policy directed at improving tax discipline. One way of offsetting the possible harm to tax compliance from a less progressive tax could be an adjustment of penalty and monitoring functions.

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Paper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 200712.

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Date of creation: 15 Sep 2007
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Handle: RePEc:san:wpecon:0712
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