Taxpayers' Behavioural Responses and Measures of Tax Compliance 'Gaps': A Critique
The work of Feldstein (1995, 1999) has stimulated substantial conceptual and empirical advances in economists’ approaches to analysing taxpayers’ behavioural responses to changes in tax rates. Meanwhile, a largely independent literature proposing and applying alternative measures of tax compliance has also developed in recent years, which has sought to provide tax agencies with tools to identify the extent of tax non-compliance as a first step to designing policies to improve compliance. In this context, measures of ‘tax gaps’ – the difference between actual tax collected and the potential tax collection under full compliance with the tax code – have become the primary measures of tax non-compliance via (legal) avoidance and/or (illegal) evasion. In this paper we argue that the tax gap as conventionally defined is conceptually flawed because it fails to capture behavioural responses by taxpayers. We show that, in the presence of such behavioural responses, tax gap measures both for indirect taxes (such as the ‘VAT-gap’) and direct (income) taxes exaggerate the degree of noncompliance. Further, where these conventional tax gap measures motivate reforms designed to increase the tax compliance rate, they will likely have a tax base reducing effect and hence generate a smaller increase in realised tax revenues than would be anticipated from the tax gap estimate.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: School of Accounting & Commercial Law, Victoria University of Wellington, PO Box 600, Wellington, New Zealand|
Phone: +64 (4) 463 5775
Fax: +64 (4) 463 5076
Web page: http://www.victoria.ac.nz/sacl/about/chair-in-public-finance
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Creedy, John & Gemmell, Norman, 2012.
"Measuring Revenue Responses to Tax Rate Changes in Multi-Rate Income Tax Systems: Behavioural and Structural Factors,"
Working Paper Series
2430, Victoria University of Wellington, Chair in Public Finance.
- John Creedy & Norman Gemmell, 2013. "Measuring revenue responses to tax rate changes in multi-rate income tax systems: behavioural and structural factors," International Tax and Public Finance, Springer, vol. 20(6), pages 974-991, December.
- Andreoni, J. & Erard, B. & Feinstein, J., 1996.
9610, Wisconsin Madison - Social Systems.
- Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009.
"The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review,"
NBER Working Papers
15012, National Bureau of Economic Research, Inc.
- Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
- 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 F360-69, June.
- David E. A. Giles, 1998.
"Measuring The Hidden Economy: Implications for Econometric Modelling,"
Econometrics Working Papers
9809, Department of Economics, University of Victoria.
- Giles, David E A, 1999. "Measuring the Hidden Economy: Implications for Econometric Modelling," Economic Journal, Royal Economic Society, vol. 109(456), pages F370-80, June.
- 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.
- Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
- Martin Feldstein, 1995.
"Tax Avoidance and the Deadweight Loss of the Income Tax,"
NBER Working Papers
5055, National Bureau of Economic Research, Inc.
- 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.
- Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
- Gemmell, Norman & Hasseldine, John, 2012. "The Tax Gap: A Methodological Review," Working Paper Series 2435, Victoria University of Wellington, Chair in Public Finance.
- Raj Chetty & Adam Looney & Kory Kroft, 2007.
"Salience and Taxation: Theory and Evidence,"
NBER Working Papers
13330, National Bureau of Economic Research, Inc.
- Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series 2009-11, Board of Governors of the Federal Reserve System (U.S.).
- Looney, Adam & Kroft, Kory & Chetty, Raj, 2009. "Salience and Taxation: Theory and Evidence," Scholarly Articles 9748525, Harvard University Department of Economics.
- Sandmo, Agnar, 2005. "The Theory of Tax Evasion: A Retrospective View," National Tax Journal, National Tax Association, vol. 58(4), pages 643-63, December.
- 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 225-32, September.
When requesting a correction, please mention this item's handle: RePEc:vuw:vuwcpf:2853. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Library Technology Services)
If references are entirely missing, you can add them using this form.