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The Tax Gap: A Methodological Review


  • Gemmell, Norman
  • Hasseldine, John


The global economic crisis has highlighted the continuing problem of tax evasion. For tax agencies to respond, an important antecedent necessitates knowing the extent of the problem. This study is the first to comprehensively review recent research on the tax gap. Our primary contributions are two-fold. First we argue that the tax gap, as conventionally defined, is conceptually flawed because it fails to capture behavioral responses by taxpayers adequately. Our second contribution is to review methods for measuring the tax gap and compare empirical estimates. We suggest that many of the most trenchant criticisms of conventional tax gap measurement (and the ‘hidden economy’ measures that underlie them) leave only microdatabased measures of tax non-compliance as likely to deliver more reliable tax gap estimates. Even here, however, further work is required, on both conceptual and empirical aspects, before tax gaps suitable for policy analysis (e.g. implications for enforcement policy) are likely to be delivered.

Suggested Citation

  • Gemmell, Norman & Hasseldine, John, 2012. "The Tax Gap: A Methodological Review," Working Paper Series 2435, Victoria University of Wellington, Chair in Public Finance.
  • Handle: RePEc:vuw:vuwcpf:2435

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    References listed on IDEAS

    1. Jonathan S. Feinstein, 1991. "An Econometric Analysis of Income Tax Evasion and its Detection," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 14-35, Spring.
    2. Christopher Bajada, 2003. "Business Cycle Properties of the Legitimate and Underground Economy in Australia," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 397-411, December.
    3. Giles, David E A, 1997. "Testing for Asymmetry in the Measured and Underground Business Cycles in New Zealand," The Economic Record, The Economic Society of Australia, vol. 73(222), pages 225-232, September.
    4. Mark Harris & Simon Feeny, 2003. "Habit persistence in effective tax rates," Applied Economics, Taylor & Francis Journals, vol. 35(8), pages 951-958.
    5. Giles, David E A, 1999. "Measuring the Hidden Economy: Implications for Econometric Modelling," Economic Journal, Royal Economic Society, vol. 109(456), pages 370-380, June.
    6. Mazur, Mark J. & Plumley, Alan H., 2007. "Understanding the Tax Gap1," National Tax Journal, National Tax Association, vol. 60(3), pages 569-576, September.
    7. Gupta, Sanjay & Newberry, Kaye, 1997. "Determinants of the variability in corporate effective tax rates: Evidence from longitudinal data," Journal of Accounting and Public Policy, Elsevier, vol. 16(1), pages 1-34.
    8. Bajada, Christopher, 1999. "Estimates of the Underground Economy in Australia," The Economic Record, The Economic Society of Australia, vol. 75(231), pages 369-384, December.
    9. Christopher Bajada & Friedrich Schneider, 2005. "The Shadow Economies Of The Asia-Pacific," Pacific Economic Review, Wiley Blackwell, vol. 10(3), pages 379-401, October.
    10. Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 119-128, March.
    11. Feige, Edgar L., 1990. "Defining and estimating underground and informal economies: The new institutional economics approach," World Development, Elsevier, vol. 18(7), pages 989-1002, July.
    12. Slemrod, Joel & Blumenthal, Marsha & Christian, Charles, 2001. "Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota," Journal of Public Economics, Elsevier, vol. 79(3), pages 455-483, March.
    13. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
    14. Richard Cebula & Chris Paul, 2000. "The pedagogy of tax evasion: Its extent and its determinants," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 6(4), pages 710-721, November.
    15. David E. A. Giles, 1999. "Modelling the hidden economy and the tax-gap in New Zealand," Empirical Economics, Springer, vol. 24(4), pages 621-640.
    16. Trevor Breusch, 2005. "Australia's Cash Economy: Are the estimates credible?," Macroeconomics 0509025, EconWPA, revised 23 Sep 2005.
    17. Trevor Breusch, 2005. "Australia's Cash Economy: Are the Estimates Credible?," The Economic Record, The Economic Society of Australia, vol. 81(255), pages 394-403, December.
    18. repec:kap:iaecre:v:6:y:2000:i:4:p:710-721 is not listed on IDEAS
    19. David Giles, 1997. "Causality between the measured and underground economies in New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 4(1), pages 63-67.
    20. Austan Goolsbee, 1999. "Evidence on the High-Income Laffer Curve from Six Decades of Tax Reform," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 1-64.
    21. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-136.
    22. Feinstein, Jonathan S, 1999. "Approaches for Estimating Noncompliance: Examples from Federal Taxation in the United States," Economic Journal, Royal Economic Society, vol. 109(456), pages 360-369, June.
    23. Trevor Breusch, 2005. "Estimating the Underground Economy using MIMIC Models," Econometrics 0507003, EconWPA, revised 15 Dec 2005.
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    Cited by:

    1. Thorben C. Kundt & Florian Misch & Birger Nerré, 2017. "Re-assessing the merits of measuring tax evasion through business surveys: an application of the crosswise model," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(1), pages 112-133, February.
    2. Leopoldo Fergusson & Carlos Molina & Juan Felipe Riaño, 2017. "I evade taxes, and so what? A new database and evidence from Colombia," DOCUMENTOS CEDE 015444, UNIVERSIDAD DE LOS ANDES-CEDE.
    3. repec:kap:itaxpf:v:25:y:2018:i:1:d:10.1007_s10797-017-9448-1 is not listed on IDEAS
    4. Feige, Edgar L., 2015. "Reflections on the meaning and measurement of Unobserved Economies: What do we really know about the “Shadow Economy”?," MPRA Paper 68466, University Library of Munich, Germany.
    5. Jean-François Brun & Maïmouna Diakite, 2016. "Tax Potential and Tax Effort: An Empirical Estimation for Non-resource Tax Revenue and VAT’s Revenue," Working Papers halshs-01332053, HAL.
    6. Gemmell, Norman & Hasseldine, John, 2013. "Taxpayers' Behavioural Responses and Measures of Tax Compliance 'Gaps': A Critique," Working Paper Series 2853, Victoria University of Wellington, Chair in Public Finance.

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    tax evasion; tax gap; behavioral responses;

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