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Taxing Cash to Fight Collaborative Tax Evasion?

We build a model of collaborative tax evasion where a buyer negotiates a price discount with a seller in exchange for not asking the receipt and paying cash, which eases tax evasion. Sellers and buyers are heterogeneous with respect to their honesty and to their cost of managing non cash payment instruments. We study the effect of two policy instruments, a tax rebate for the buyer that keeps the receipts and a tax on cash withdrawals (TCW), on tax evasion and government revenue. We find that a mix of these two instruments can reduce tax evasion and increase revenue. The TCW is effective only if sufficiently high, and it must be higher the higher the tax evasion in the country and the bigger the mass of individuals that typically pays in cash. We discuss the implementation problems of the TCW and we suggest how to partially overcome them.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 351.

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Date of creation: 02 Jan 2014
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Handle: RePEc:sef:csefwp:351
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