Tax Rates and Tax Evasion: Evidence from California Amnesty Data

The effect of marginal tax rates on income tax evasion is examined using data from the California Tax Amnesty Program, which provided amnesty for people who had not filed returns, had filed inaccurate returns, or were delinquent in paying their tax liabilities. People under criminal investigation were not eligible. After correcting for the selectivity bias, it was found that tax evaders respond to higher marginal tax rates by increasing their evasion activity. The results also confirm the theoretical prediction that people with higher levels of income tend to evade more. The absolute and relative sizes of income and tax rate changes depend on the scope of the evasion measure used. In particular, the absolute effects of income and tax rate changes are larger for the income-based measures of evasion, while the relative effects are larger for the tax-based measure of evasion. Finally, the results suggest that evasion generally is inelastic with respect to changes in both true income and marginal tax rates but that tax rate inelasticities are consistently larger than income elasticities

Nonlinear regression in tax evasion with uncertainty: a variational approach

One of the major problems in today's economy is the phenomenon of tax evasion. The linear regression method is a solution to find a formula to investigate the effect of each variable in the final tax evasion rate. Since the tax evasion data in this study has a great degree of uncertainty and the relationship between variables is nonlinear, Bayesian method is used to address the uncertainty along with 6 nonlinear basis functions to tackle the nonlinearity problem. Furthermore, variational method is applied on Bayesian linear regression in tax evasion data to approximate the model evidence in Bayesian method. The dataset is collected from tax evasion in Malaysia in period from 1963 to 2013 with 8 input variables. Results from variational method are compared with Maximum Likelihood Estimation technique on Bayeisan linear regression and variational method provides more accurate prediction. This study suggests that, in order to reduce the tax evasion, Malaysian government should decrease direct tax and taxpayer income and increase indirect tax and government regulation variables by 5% in the small amount of changes (10%-30%) and reduce direct tax and income on taxpayer and increment indirect tax and government regulation variables by 90% in the large amount of changes (70%-90%) with respect to the current situation to reduce the final tax evasion rate

Why Do People Pay Taxes? An Explanation Based On Loss Aversion And Overweighting of Low Probabilities

Given actual probabilities of audit and penalty rates observed in the real world, tax evasion should be an extremely attractive gamble to an expected utility maximizer. However, in practice, one observes too much compliance relative to the predictions of expected utility. This paper considers an alternative theoretical model that is based on Kahneman and Tversky's cumulative prospect theory. The model predicts empirically plausible magnitudes of tax evasion despite low audit probabilities and penalty rates. An increase in the tax rate leads to an increase in the amount evaded- a result, which is both, intuitive, and factual, but is contrary to the prediction made by expected utility theory. Furthermore, the optimal tax rates predicted by prospect theory, in the presence of tax evasion behaviour, are consistent with actual tax rates.Tax Evasion; Loss Aversion; Decision Weights; Prospect Theory; Optimal taxation

Minimumwage and tax evasion: theory and evidence

This paper examines the interaction between minimum wage legislation and tax evasion by employed labor. I develop a model in which firms and workers may agree to report less than the true amount of earnings to the fiscalauthorities. I show that introducing a minimum wage creates a spike in the distribution of declared earnings and induces higher compliance by some agents, thus reducing their disposable income. The comparison of food consumption before and after the massive minimum wage hike that took place in Hungary in 2001 reveals that households who appear to benefit from it actually experienced a drop compared to similar but unaffected household, thus supporting the prediction of the theory.minimum wage, tax evasion, Hungary.

Tax evasion, information reporting, and the regressive bias hypothesis

A robust prediction from the tax evasion literature is that optimal auditing induces a regressive bias in e¤ective 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